Prime Minister Narendra Modi's reform agenda suffered a major blow on Thursday when lawmakers ended the monsoon parliament session without approving a tax reform bill aimed at boosting economic growth.
The Goods and Services Tax (GST) bill was considered low-hanging fruit among free-market reforms as it has rare bipartisan support. But it fell victim to a political impasse over allegations of impropriety against Modi's cabinet and party colleagues.
Modi's failure to secure parliament's backing for the measure could push back politically contentious bills such as labour and land legislation, which businesses and economists say are critical to create jobs for millions entering the workforce.
Political opposition had already forced the leader to backtrack on a pro-business land bill that would have made it easier to acquire farmland and help realise his vision of building modern cities and industrial corridors.
Shilan Shah, an economist with Capital Economics, said it would now be almost impossible to meet the deadline, and predicted a series of state elections over the next two years would make politically unpopular reforms harder.
"The bigger picture is that PM Modi has missed another major opportunity to push ahead with contentious reforms," he wrote in a research note.
Modi has the option of calling a special sitting of parliament to pass the bill before the next scheduled session in the winter. But he would first need to strike a deal with the opposition Congress party that is adamant in its demand for the resignation of three of Modi's colleagues.
Indian businesses have long coveted GST to subsume a thicket of federal and state levies, a chaotic structure that inflates costs. Supporters say GST will add up to two percentage points to economic growth and boost domestic trade.
After years of political wrangling, it was blocked by its original authors.
The Congress party, which lost power to Modi last year, championed the measure while in office. By scuttling the new sales tax, for now, the party has denied Modi a victory ahead of his annual Independence Day speech on Saturday.
Congress party lawmakers prevented the house from functioning each day of the three-week sitting.
"India's political class is displaying a lack of maturity," said MS Unnikrishnan, managing director at capital goods maker Thermax.
"This obstructionist politics is harming the country, blocking economic progress."
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