That India is diverse is a well-known fact; Indians speak a variety of languages, practice a variety of religions and espouse a variety of ideologies. Perhaps less known is how India's political system has managed this diversity. Often, reforms pivot on the hope of progress, then buckle under the contradictions inherent in India's raucous federalist system. Indian Prime Minister Narendra Modi took a step toward reform on Wednesday by modifying the long-pending Goods and Services Tax bill, adding provisions to remove the country's 1 percent interstate tax and to guarantee state reimbursements for up to five years of lost tax revenue. The benefits of the proposed legislation are numerous. By unifying the country's multiple overlapping tax regimes, it could lower manufacturing costs, promote interstate trade, boost consumption and tax collection, and expand India's economy by up to two percent. Even so, passing it will be no small feat.
As a country, India challenges the one-nation, one-language model pioneered in Europe. Throughout Europe, nations are founded around relatively discrete language groups: Germans speak German, and the French speak French. In India, by contrast, distinct states roughly conform to the idea of a nation, culturally and linguistically. Gujaratis speak Gujarati, Punjabis speak Punjabi and Tamils speak Tamil. India is a country of many nations, each with different interests, and language is only one of many markers of the country's varying identities.
The difficulties of accommodating so many disparate constituencies slows down India's democracy. When Modi broached the subject of labor reform last year, for instance, a group of unions representing 150 million workers held a nationwide strike, effectively scuppering the initiative. Then when Modi tried to advance land reform last year, the opposition Indian National Congress leader led a march to the Parliament building, forcing Modi to retreat.
India's traditionally strong states and weak central government also pose challenges to reform. But the barriers to achieving Modi's principal objectives — promoting growth and creating jobs — have been especially formidable. Because different states in India have their own tax systems, trucks carrying goods across the country must stop at interstate borders to fill-out tax paperwork, increasing cost and transit time. The goods themselves, moreover, are taxed not at the point of consumption but at each stage of their development. The resulting tax inefficiencies stymie interstate commerce. Modi's bill proposes to fix that.
Despite its many advantages, the bill is not without its political vulnerabilities. Instating a national value-added tax in India could boost inflation by as much as 2 percent for up to two years. Facing elections in 2019, Modi is rushing to pass his signature legislation. Otherwise, the Indian National Congress political party, which has intentionally delayed passing the bill, could turn the legislation's side effects to its advantage, portraying the higher inflation rate as a result of Modi's economic mismanagement during election season. Modi's finance minister has spent the year trying to get India's states on board with the legislation, enticing them with incentives such as tax reimbursement. Modi's Bharatiya Janata Party has built an impressive coalition of parties in support of the bill, making its passage a strong possibility for the current monsoon session of Parliament.
But passing the bill is only half the battle. Even if the Parliament approves the bill, each state will have to pass a version of the legislation, a process that promises to be lengthy and arduous. Likewise, implementing the bill at the local level, which is rife with corruption, will be an undertaking of its own.
The Goods and Services Tax, along with Modi's other reforms, is intended to boost India's economy, which needs to push past its current 7.6 percent growth rate if the country is to keep pace with its surging job market. Modi wants to turn the world's largest democracy into the world's largest success story, and India's complex legislative process is just one of the many factors that will temper his ambitions.