India heads down right path at wrong speed

In recent weeks, India's government has shown unusual amounts of energy in pushing through long-awaited economic reforms. The last session of Parliament — cut short when several MPs tested positive for Covid-19 — was exceptionally productive.

Two labour-law amendments were passed, as was a package of measures addressing the agricultural sector.

However, you look at it, these moves take India in the right direction. They don't go far enough, are badly planned and have been poorly communicated —nevertheless, they are grounds for optimism.

Cautious optimism, however, because the take-no-prisoners political style of India's ruling party threatens to undermine the impact of its own reforms. The government completely undercut Parliament in its effort to ram through the legislative changes. Little or no effort was made to get other political parties on board. And India's states can justifiably complain that issues on which they have traditionally set policy (and gained revenue) are being appropriated by the federal government.

Prime Minister Narendra Modi is unwisely ignoring the central difficulty of reform in India: While you can't wait for everyone to agree before you make changes, you can't impose them with zero agreement, either.

It's hard to overstate how different Modi's approach is from the one that India has traditionally taken to economic reform. One of the strengths of the Indian system is that the state has prized consensus-building. That's why there has never really been a sustained political or popular backlash to past reforms.

It would not have been hard to take a similar approach in this case, too. Modi himself has demonstrated how it can be done in the past: A couple years ago, the effort to overhaul India's indirect tax regime represented a joint, all-party, state-and-Union effort.

That moment seems to belong in the past now. In recent years, even the nationwide goods-and-services tax — one of Indian federalism's proudest achievements — has become a cause of conflict. Partly, the pandemic is responsible: The finance ministry in New Delhi told its counterparts in the states that it simply would not be able to live up to the promises it had made as part of the grand bargain of tax reform, blaming an "act of God." Not an act of God, but an act of fraud, insisted the finance minister of West Bengal.

The new reforms must contend with this charged atmosphere. In agriculture, the government decided to "bypass" the states' rights and powers over agricultural marketing and open up trade outside previously existing, state-controlled wholesale yards. States will lose the revenue they'd received from taxing transactions at these "mandis," as they were called.

Already, opposition-ruled states are refusing to implement the new laws. This will severely undercut Modi's stated ambition of a single national market for agricultural produce.

The simple fact is that, in India's complex federal system, it's up to the central government to ensure political buy-in at every level for big reforms. Yes, that takes time, costs political capital and requires compromise. But without the effort, the reforms just won't work. Modi himself — who as a state chief minister in Gujarat excelled in extracting concessions from New Delhi — surely knows this better than anyone else.

The costs of railroading through changes without concern for what state governments think will be paid not now, not next year, but over the decades to come as India turns fractious. One former federal finance minister issued a stark warning: "One Nation, One Everything will eventually destroy One Nation."

There's a similar problem with the new labour reforms. As with agricultural reorganization, new codes governing the hiring and firing of workers have been long overdue. In the interim, the government has allowed states to develop a patchwork of different regulations that employers find excessively confusing.

The federal government, which has the constitutional right to legislate alongside states on labour issues, needed to get all the states — and, by extension, various opposition parties — on board with employment reform in order to enact a single, simple set of labour regulations across the country. Instead, the government chose not to send its latest amendments to the parliamentary committees where the hard work of hammering out compromise is done.

Modi's party has won two general elections easily. There is every reason to suppose it would win again if voting were to take place tomorrow. But the Indian system is not set up to be winner-takes-all. It requires cooperation between the central government and states, between multiple centres of power.

Modi has the political capital to further that cooperation and make those compromises. The reforms he wants to push have the enormous momentum of ideas that have long been argued for. So there's very little excuse for ramming them through without a proper effort to build consensus — especially when the effort risks turning them into mere words on paper.

Mihir Sharma is a Bloomberg Opinion columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of "Restart: The Last Chance for the Indian Economy."

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.