The state government of Kerala in India announced on 14 January that it had launched a challenge in the Supreme Court to the Citizenship (Amendment) Act (CAA), passed by the Parliament of India on 11 December 2019. This increases the risk of disputes between the central government led by Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) and non-BJP state governments, likely increasing protests and delaying compensation to states.

Opposition to the CAA by India's state governments is increasing the risk of prolonged disputes between the central and state governments. Prior to the challenge by the Kerala state government, India's main opposition Indian National Congress party announced on 9 January that the central government should withdraw the CAA. As of January 2020, up to 10 state governments have opposed the implementation of the CAA within their jurisdictions. These include non-BJP state governments, but also involves states governed by parties allied with the BJP, such as Assam, governed by the Assam People's Association (Asom Gana Parishad: AGP), and Bihar, led by the Janata DalUnited (JD-U) party. Given that 'citizenship' falls under the jurisdiction of the central government, it is likely that Prime Minister Modi will pursue strong measures to force implementation of the CAA despite states' opposition. The dispute most likely will advance to the Supreme Court, with a low probability, high impact scenario in which the central government proposes the imposition of the president's rule in states that oppose the measure, most likely states with non-BJP governments.

As well as over the CAA, disputes between the central and state governments will likely worsen because non-BJP state governments were already criticising the central government during 2019 over delayed payments due to them under the Goods and Services Tax (GST). Media reports indicate that the central government is at risk of defaulting on GST compensation to the states by February 2020. The August-September 2019 payments were made only in mid-December. IHS Markit data also show that India's net tax revenue fell year on year from fiscal year (FY) 2018/19 to FY 2019/20, while total expenditure increased. The delays have come as GDP growth slowed to its lowest in more than six years: IHS Markit now projects only 4.8% GDP growth for the fiscal year to 31 March 2020, down from 6.8% for FY 2018/19. In addition to GST compensation - and as a probable retaliation for opposition to the CAA - the central government is likely to hold back other payments due to the states that fund welfare projects, such as for education, health, rural unemployment, and disaster relief. This increases the likelihood that state governments will sue the central government at the Supreme Court for GST payments.

Escalating central and state government disputes hold the potential to fracture India's policy-making environment beyond the one-year outlook, requiring companies to comply with different rules depending on collaboration with the central government or with non-BJP state governments. These disputes will most probably be manifested as non-BJP state governments seeking to reverse consolidation of executive power in Prime Minister Modi's government since 2014. This will be facilitated by losses for the BJP in state-level elections: as of December 2018, the BJP formed 21 state governments in India; as of January 2020, this had decreased to 13 states. Likely most affected are the infrastructure and manufacturing sectors, as well as the operationalisation of special economic zones. Furthermore, non-BJP state governments are also likely to pursue state-specific land acquisition legislation, minimum wage policies, and tax concessions.

Indicators of changing risk environment

Increasing risk

• State elections are due in February 2020 in Delhi (controlled by a non-BJP government) and in October 2020 in Bihar (where the BJP governs in alliance with the JD-U), in which a loss for the BJP would indicate that the CAA is further diminishing the electorate's approval of the party, likely encouraging more BJP and non-BJP governed states to demand withdrawal of the CAA.
• The central government likely will delay payments to states which, in addition to opposing the CAA, also start opposing the National Register of Citizens (NRC) and/or stop work on the National Population Register (NPR), which are considered as the next steps to the CAA by the opposition.
• If the central government defaults on its GST payment obligations, the states will be more likely to sue the central government, and not demand GST rates are increased.

Decreasing risk

• If the Supreme Court rules in favour of the Kerala state government's petition on the constitutionality of the CAA, it will significantly de-escalate the avenues for states' opposition to the central government.
• If the central government officially announces a temporary stop to work on the NRC and the NPR, it will likely limit the protests and states' opposition to central government policy.

Posted 22 January 2020 by Deepa Kumar, Head of Asia-Pacific Country Risk, S&P Global Market Intelligence