Chief Economic Advisor Kaushik Basu sounded a warning bell at the Carnegie Endowment in Washington, DC, last week, saying that big-ticket reforms would probably have to wait to be carried out for the next government, after general elections in 2014. Professor Basu has since rolled back that announcement a bit, saying that he does not expect all reforms to be stalled and some big reforms, indeed, could be expected in the next six months. However, as he pointed out, the goods and services tax (GST) is an example of an important reform that needs political consensus, and one that the United Progressive Alliance (UPA) government seems unable to generate any push towards. Several different factors have combined to create the policy paralysis in which India finds itself today. A timid and divided government is one of them, beset by doublespeak about the benefits of reform and assertive, anti-reform coalition allies. The bureaucracy, as Prime Minister Manmohan Singh pointed out in a speech on Saturday, has become increasingly risk-averse. And many reforms require states’ consent, which is increasingly hard to come by, as resurgent regional parties make the Centre’s job ever more difficult.
Yet there is little doubt that the UPA will have to scrape together whatever courage it possesses and take a few much-needed steps to control India’s imploding growth story. The next few months are a window of opportunity; the UPA must not allow them to pass without taking the initiative essential to its survival. Yes, the Trinamool Congress of West Bengal Chief Minister Mamata Banerjee continues to be a thorn in the UPA’s side — it is now threatening to re-evaluate its relationship with the UPA unless a special package for West Bengal is agreed upon in a fortnight. The Opposition, too, has scented blood; the Bharatiya Janata Party has been boosted by victory in the very visible local government elections in Delhi, and the constituents of the National Democratic Alliance are showing a new-found solidarity. Yet there is much – as Professor Basu himself has now pointed out – that the government can and must nevertheless do. Subsidy reform is the most important. It was announced by Finance Minister Pranab Mukherjee in the Budget that there would be a cap on the amount of subsidy expenditure. The government must show that the announcement was more than just words, by looking at fuel subsidies in particular. The government’s concerns over the inflationary aspect of fuel subsidies have been addressed even by the Reserve Bank of India, which in its annual monetary policy statement said that it believed that only a fraction of fuel price increases would be passed on to consumers, as India’s fuel-using producers are not in a price-setting environment.
The prime minister, and others in the government, have talked often of “biting the bullet” and getting hard reform measures done. Professor Basu correctly pointed out that the political scenario is not friendly to reform right now — but the government has to reform, anyway, or pay the price of lower growth and consequently dimmer electoral prospects in 2014. The limits of do-nothing politics have been exposed; it leads to a situation where the government is running a huge fiscal deficit, the country is dangerously exposed externally, and there is little that the incumbents can take to the electorate when election campaigns begin.