Modi’s reform momentum has hit a wall

Modi’s reform momentum has hit a wall

The closer India gets to the 2024 general elections, the more the government will want to step out of the shadow of big business

Narendra Modi. Credit: PTI Photo

Investors must be wondering what promise New Delhi will break next as the ruling party tries to win upcoming state elections. First, the government made a U-turn on the three laws that Prime Minister Narendra Modi wanted to use to shake up the stagnant farm economy. Next, he may delay implementing the four codes that have been billed as the “biggest labour reforms in independent India.” Has the Modi momentum finally come up against a wall?

Take the labour laws passed by Parliament in September last year. So far, only 10 out of India’s 28 states have followed through by finalising rules on industrial relations, wages, social security and workplace safety. Considering that Modi’s party is in power in 17 states, politicians clearly fear resistance.

It’s been a longtime demand by the business community that industrial units with fewer than 300 workers shouldn’t require government permission to fire employees. (The federally mandated limit currently affects factories employing more than 100 workers, acting as a perverse incentive against growth, though some states have relaxed the rules.) Still, codifying this concession won’t exactly win votes.

Similarly, giving a legal boost to retirement nest-eggs — as the new rules demand — will ultimately benefit employees. Yet, they won’t be thrilled if it means lower take-home pay now.

Why is it so hard for a powerful — and, after more than seven years in the top job, still highly popular — leader to enforce his will?

Modi promised sweeping, productivity-enhancing changes to factors of production — land, labour and capital. He also pledged a revamp of crucial commodity markets like food. In each instance, being perceived as pro-big business was the undoing of his policies.

The first setback was land. The previous government, battling popular anger for allowing land grabs in the name of special economic zones, had passed an acquisition law in 2013 that big business found too restrictive. Within a year of becoming Prime Minister, Modi tried to tilt the balance so that village plots could be acquired more easily for infrastructure or affordable housing. But opposition leader Rahul Gandhi mocked him in Parliament for favouring crony capitalists dressed in “suits and boots.” Modi gave up the idea.

Ditto the controversial agriculture laws. Modi backed them to the hilt against relentless protests by farmers. But since the overall package gave the impression that the State was going to retreat from grain procurement, leaving farmers at the mercy of large business groups, it became too hot a potato to hold through next year’s state elections in Uttar Pradesh and Punjab. So Modi dropped his ambitious plan, closing the door at least for some years on reforms of the subsidy-ridden farm and food economy.

Now, it looks like the new labour codes are going into cold storage, too.

Meanwhile, reforms to improve capital allocation in the economy are a mixed bag. Despite opposition from bank employees’ unions, a bill — to be introduced in the upcoming winter session of Parliament — will pave the way for privatising two State-run lenders. Investors will pay attention to the fate of this law.

They should also closely watch the government’s Rs 6 lakh crore ($80 billion) asset recycling plan. This, too, could potentially become a political minefield.

For instance, while New Delhi has aggressive plans to privatise the management of train stations, the extra money people may have to shell out for improved railway services could become a sensitive issue, especially with less affluent voters who may soon also have to bear the burden of higher consumption taxes.

If business groups that are seen to be close to the Modi government charge those additional user fees, opposition parties will get fresh ammunition to attack the Prime Minister.

The closer India gets to the 2024 general elections, the more the government will want to step out of the shadow of big business, and the more his opponents will try to keep it there. In the process, significant chunks of Modi’s economic agenda could get delayed or scrapped. The reversal of farm laws and a possible stalling of the new labour codes could be the beginning of two years of inertia.