Why GST is good news for BJP, Congress and India

Earlier today (August 3rd), India’s upper house of parliament passed a constitutional amendment paving the way for a nationwide goods and services tax.

After it crosses remaining hurdles and is implemented, GST will likely be among the most significant economic reforms in India’s history. It unifies a patchwork of states into a single market, simplifies a tangle of state and central taxes, and, according to estimates, could potentially boost economic output by as much as 1.7%.

For now, here’s how the passage of GST affects the wider debate about economic reforms in India.

  1. Narendra Modi earns the reformer tag. Until now, skeptics have argued that this government has not used its unprecedented mandate to push politically tough but necessary reforms. The passage of GST makes that argument harder to make. GST has been on a short-list of so-called “big bang” reforms for over a decade. Prime Minister Modi and Finance Minister Arun Jaitley deserve credit for finally making it a reality.
  2. Congress earns points for supporting the bill. In the run up to the vote, I wrote in the Wall Street Journal that the opposition Congress party faced a moment of truth. Though it had proposed GST when in office it had thwarted it in opposition. Continued opposition in the face of a near national political consensus behind the bill would have shown Congress as badly out of step with the national mood, and especially with middle class aspirations. That the BJP too had blocked GST while in opposition would have done little to blunt the dominant narrative that Congress was playing spoilsport on a landmark economic reform. By supporting the bill — after forcing through sensible changes — Congress ends up looking like a responsible national party able to put aside partisanship in the national interest. It also shows that party pragmatists haven’t entirely lost ground to left wing ideologues.
  3. A boost for the India story. After ten years of populism under Congress (2004–14), and two years of “creative incrementalism” under the BJP, the Indian economic story risked losing sheen. The broad consensus on GST shows that even in a complex and contentious democracy politicians can come together in the larger national interest. The New York Times called it a “Reverse Brexit.” For the FT, it’s “one of the most significant reforms to the Indian economy since liberalisation began 25 years ago.” The Wall Street Journal called it “an important step in Prime Minister Narendra Modi’s campaign to modernize Asia’s No. 3 economy.” In short, the government is beginning to live up to expectations generated by Modi’s landslide victory in 2014.
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