India govt retreats on parliament plan for vital tax measure

[NEW DELHI] India's government has given up plans to reconvene a parliament session to secure approval for a common goods and services tax because of lack of political support, the finance minister said on Wednesday, making it harder to meet an April 2016 deadline to implement the reform.

The retreat came just as Prime Minister Narendra Modi's administration has been assuring an increasingly sceptical business community that Asia's third-largest economy can withstand global market turbulence and China's slowdown.

Finance Minister Arun Jaitley said a cabinet committee had recommended to President Pranab Mukherjee that he prorogue the monsoon session of parliament that had been kept alive since last month to allow for a consensus on the GST.

"There was a meeting of the cabinet committee on political affairs. It was decided to recommend the president to prorogue the monsoon session. We will keep trying, we are in touch with all political parties," Mr Jaitley said.

The main opposition Congress party, which itself had pushed the tax legislation when it was in government, continued to play politics, Mr Jaitley said, throwing into doubt the April deadline. "Your guess is as good as mine," he shot back when asked if the government would be able to implement the tax measure. "It is time for political parties to display some element of statesmanship, particularly when India is trying to emerge as an important economic force."

The government needs the support of the opposition to win parliament's approval as it lacks a majority in the upper house.

Business is clamouring for the GST, which would replace an array of state and federal levies and transform India into a more uniform market. Economists estimate that could add up to 2 percentage points to gross domestic product.

"It's massive. GST has to happen," Juvencio Maeztu, India CEO for Swedish retailer IKEA, which buys wares from India but has yet to open any stores. "We cannot lose more time on this."

Fifteen months into Prime Minister Narendra Modi's term, officials are pushing hard to kickstart an economy that remains sluggish, despite rosy official growth figures.

Mr Modi met business leaders and economists on Tuesday to ask for investment; he was met with demands for trade protection and big cuts in interest rates to bolster growth.

The government has argued India's relatively closed economy offers protection against the turmoil sweeping emerging markets, but India has not been immune. Most of the gains in Indian stocks since Modi took office in May 2014 have been wiped out.

Mr Jaitley, speaking at an Economist conference earlier in the day, said it was vital to stay on the path of reform and build toward higher growth, which the International Monetary Fund forecasts at 7.5 per cent this year.

Touching on a sensitive subject for investors, Mr Jaitley said the government was also seeking to resolve pending tax disputes and hoped to resolve "legacy" issues in short order.

The finance ministry decided last week against pursuing demands for foreign portfolio investors to pay Minimum Alternate Tax. But India is still locked in back-tax disputes with UK telecoms group Vodafone and Cairn Energy.

Without referring to these directly, Jaitley said the government hoped to resolve pending disputes "in not much time".

India's ability to generate an investment-led economic recovery has been compromised by the legacy of a debt-fuelled boom that followed the 2008 global financial crisis.

Asked whether bad loans were the main worry for the economy, Mr Jaitley said: "The banking system is a matter of concern - it is not the main worry, there are no grounds for panic." He said he would be open to looking at consolidation between fragile banks and their stronger competitors.

REUTERS