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India after the elections

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In Brief

The Indian election result surprised everybody, but the response to it was predictable.

Business and the media share a new optimism that Dr. Manmohan Singh and his ‘dream team’, now about to lead a strong, stable Congress government, will roll out the market reforms that eluded them during the last five years.

First the good news. The election result has clipped the wings of venal, populist caste-based parties in north India, and dealt a blow to Hindu chauvinism coming from the opposition BJP. Indian secularism and cohesiveness have emerged stronger. But the prevailing bullishness on economic reforms is misplaced.

Optimists assume that Dr. Singh and his colleagues are genuine reformers who were shackled by unstable coalition politics in the last government. My view is that they are bogus reformers who lacked the character, competence and courage to take advantage of reform windows of opportunity. Rather, they sat comfortably in office, and relied on a combination of reforms done by the previous BJP-led government and a very favourable global economic environment to deliver record growth rates – for which they claimed credit. Messy coalition politics was an excuse to do nothing.


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Now that excuse is gone. With a strong mandate, one must hope that Dr. Singh and his team become real reformers and belatedly push through much-needed measures. The list is long: repairing public finances; reducing trade protectionism and restrictions on foreign direct investment; privatisation; pensions reform; infrastructure development; reducing internal-market controls on agriculture; strengthening property rights, especially in the countryside; labour-market deregulation; reducing wasteful subsidies, especially on fuel and fertiliser; and, not least, reform of basically unreformed public services.

Some of these reforms are urgent in light of the global economic crisis and a bleak medium-term global economic outlook – very different from the benign global economic climate from the early 1980s to 2007. Indian growth is projected to be about 5 per cent this year – just above half what it has been in recent years. India cannot afford to continue to live off the fruits of past reforms. Without new reforms, it will probably be condemned to much lower growth, with grave consequences for employment, poverty and social stability.

No one can seriously expect the incoming government to unleash a new wave of thoroughgoing reforms. But pressure should be exerted on Dr. Singh to launch a mini-set of reforms where there are windows of political opportunity. The first priority should be to ‘do no further harm’. The Congress-led government has gone on a spending spree, but with revenues now falling the consolidated budget deficit is edging up to 11 per cent. Fiscal-stimulus packages make matters worse. Public spending should be restrained and the budget deficit progressively reduced to sustainable levels – as set out in the Fiscal Responsibility and Budget Management Act of 2003. Also, new trade restrictions, open-ended subsidies and price controls – ostensibly to combat external shocks – should be resisted.

Next, Dr. Singh should get parliament to approve the increase of the foreign-investment cap in insurance to 49 per cent of equity as soon as possible. Other pending legislation, notably on banking and pensions reforms, should be pushed through. Restrictions on foreign investment in the retail sector should also be reduced, so that the likes of Wal Mart, Tesco and Carrefour can come into the Indian market, preferably with majority or full ownership. Tariffs on industrial goods should be simplified and reduced to Chinese and ASEAN levels. And infrastructure development – ports, roads and airports – through transparent public-private partnerships should be prioritised.

Finally, ‘how to reform’ is as important as ‘what to reform’. Dr. Singh has proved a weak and inept prime minister. He has set up countless commissions of the worthy, left policy to competing ministerial fiefdoms, and avoided knocking heads together and taking tough decisions himself. This must change. He must lead from the front and strengthen inter-ministerial coordination in the prime minister’s office. But I am not sure he has the necessary bottle or political instinct.

My fear is that the Manmohan Singh Mark II government will turn out to be not that different from the Manmohan Singh Mark I government. Bogus reformers may remain bogus. The government may continue to spend wastefully without reforming public services, leading to a further deterioration of public finances.

Anti-market sentiment, now stronger in Congress in the wake of the global economic crisis, may encourage further reform slippage and reinforce ‘old Congress’ elements. The latter are sceptical of market liberalisation, utterly corrupt and addicted to an Indian state – the creation of the Congress Party – that leeches off the poor in particular. They will be well represented by old-style politicians in the cabinet. That is why new reforms will not be a shoo-in.

The author is director of the European Centre of International Political Economy and on the faculty of the London School of Economics. This blog post also appears on ECIPE’s blog, and can be found here.

One response to “India after the elections”

  1. Much as I would like to believe that Manmohan Singh II will accelerate the pace of reforms, there is another angle to consider which suggests that your despondency may be justifiable. The spectacular success of Congress candidates particularly in the North has been attributed to populist measures with the masses such as elimination of loan liabilities for small farmers and guaranteed employment schemes. A Party that attributes its tidal wave of electoral support to such measures is unlikely to prescribe much less prosecute the sometimes painful reforms that are long overdue. In fact, the reappointment of several former Ministers is disappointingly suggestive of more of the same.

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