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Economy

After historic tax reform, Modi's next task is job creation

Now in his third year, prime minister needs tangible results to win a second term

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India's Prime Minister Narendra Modi speaks to his supporters at an election campaign rally in February.   © Reuters

NEW DELHI -- Indian Prime Minister Narendra Modi is preparing to carry out India's biggest tax system reform since independence, following the recent unprecedented demonetization of certain large-denomination bank notes.

The two policies introduced by Modi, who marked his third year in office on May 26, are the greatest of the tasks to unify India, which boasts the world's second-largest population. If he demonstrates achievements closest to the hearts of the public, such as job creation and income growth, in the remaining two years of his first term, he is likely to be elected for a second term, from 2019-2024.

The Goods and Services Tax will merge indirect taxes, which are currently individually applied by state governments, into a single tax. Although the new system is a result of compromises -- for example, it has four different tax rates, 5%, 12%, 18% and 28% -- it is undeniably a historical reform. The roll out date is set for July 1.

The significance of the tax reform is evident in the membership of the GST Council which held its 14th meeting on May 18-19. With 32 finance ministers attending -- Arun Jaitley, the finance minister of India, and those of the country's 29 states and two Union territories -- the meeting took on the feel of an international conference.

While the states have until now been treated like separate countries, the reform means India will at last become a centralized nation in terms of taxation, 70 years after independence.

The central government pledged to compensate the states for declining tax revenue for five years after the introduction of the GST. While this was one reason the states agreed to give up their discretion on taxation, they no doubt reached the deal thanks to Modi's growing political power.

Legislation to amend the constitution to allow the introduction of the GST, endorsed by both the ruling and the opposition parties, passed the Senate in August 2016 after the ruling Bharatiya Janata Party, led by Modi, scored a landslide victory in the northeastern state of Assam.

"The [election] result is an advantage for the GST because those who were trying to obstruct it suffered a setback," Jaitley said in an interview with the Nikkei Asian Review in May last year. He cited the effects of election losses suffered by the former ruling party, the Indian National Congress, and some regional parties that stood against the GST.

The BJP also scored runaway victories in Uttar Pradesh and other states in local elections in February and March.

The GST is not the only policy Modi has pursued for India's economic unification. He continually insists, "We all have to work ceaselessly for the realization of the dream of 'One India, Great India.'"

In November 2016, the Modi government demonetized two large-denomination bank notes -- the 500 and 1,000 rupee ($7.50 and $15) notes -- in a bid to smother the huge informal economy, which is said to be equivalent to a third of India's gross domestic product. The move was also meant to expand the official economy.

India will become "one country and one economy," both in name and reality if the so-called "head-and-tail" economies, which have divided its population of 1.3 billion, are unified, as are state-based economic zones.

Direct investment in India from abroad has been increasing more than 20% annually since the Modi government took office. Commerce and Industry Minister Nirmala Sitharaman told the NAR on May 15 that investment will "undoubtedly" keep increasing at a double digit rate.

If the GST system, which will help companies manage their operations more efficiently, works as planned, India may rise in the World Bank's "Doing Business" ranking from the current 130th place toward its long-cherished 50th.

The system also has the potential boost India's economic growth from the current 7% level.

No effects yet

Ordinary citizens have yet to see the effects of the reform initiative. "Modi's policies are all what the previous government started," said Vijendra Singh, a 60-year-old restaurant operator in Uttar Pradesh.

The rate of unemployment in the state has dropped to 5% from more than 16% a year ago, according to the Bombay Stock Exchange and the Center for Monitoring Indian Economy. But the drop is attributable to the full implementation of the Mahatma Gandhi National Rural Employment Guarantee Act, introduced by the previous government to ensure short-term employment in rural villages.

The failure to create enough jobs for the 14 million new workers entering the workforce every year is one of complaints about Modi by the Rashtriya Swayamsevak Sangh Hindu nationalist group, the power base of the BJP.

Attention is growing over whether the Modi administration can use the GST to boost the Indian economy and foreign direct investment to create jobs and increase incomes.

To ensure a second term by winning a general election planned for 2019, Modi will need to show enough achievements understandable through the eyes of citizens, rather than attention-getting policies such as the GST and demonetization, in the remaining two years of his first term.

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