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UPA-II wakes up

But these are not big-bang reforms

Business Standard  |  New Delhi 

The series of reforms announced at the end of last week have been widely welcomed as a way of, primarily, lifting the India growth story out of the gloom to which it had been consigned by the United Progressive Alliance’s (UPA’s) bumbling inaction for the past year and more. Reactions from the foreign press and some have overstated the measures’ impact, but also show that they might have served their purpose in averting a catastrophic loss of confidence and a ratings downgrade. However, a closer study of the exact nature and extent of the reforms shows that not only are they essentially minimalist and incremental in nature rather than the “big bang” that they are being sold as, but they are also poorly designed in some important ways.

The rise in administered by Rs 5 a litre is one such example of poor planning. Naturally, a rationalisation of was overdue. Yet, even after the increase, under-recoveries on diesel will still cross Rs 1 lakh crore. The 12 per cent diesel price increase addresses only 20 per cent of the resource gap; in the absence of further price increases, gross under-recoveries from the sale of all such petroleum products will still be Rs 1.67 lakh crore in 2012-13, about 20 per cent higher than they were last financial year. Clearly, one increase is not sufficient to plug the hole that diesel has made in the fisc. Yet the strong political opposition to the move will hardly have encouraged further boldness on the part of the government. Instead of a sequence of large hikes, the government should have announced a system of steady adjustment to a sustainable mechanism — perhaps one in which diesel receives a fixed per litre or its price is raised in small doses to completely eliminate the under-recovery. But that would require a genuinely reformist mindset, rather than administrative tinkering — and it is the latter that is at work here, as is visible from the playing around with on petrol and diesel that accompanied the hike. Some of the boldness visible in the cap on cooking gas cylinders – the first visible product of the subsidy-fixing aspect of the – should have been on display here, too.

The opening of aviation, broadcasting services, power exchanges and multi-brand retail to foreign direct investment, while a useful and important step, is unlikely to bring any short-term benefits to the economy. Global airlines are not flush with cash, nor are debt-ridden and poorly run Indian domestic carriers plum targets for investment without management control. In retail, the states have been given veto power, which is politically sensible yet will certainly delay any changes. The long-term effects, however, of investment in sourcing and supply-chain technology will be positive for both producers and consumers.

Overall, these reforms are positive in that they show that UPA-II is not a complete lame duck yet, and confidence in the India story has been partially restored. However, they are small compared to what is needed: reform of India’s mining, labour and land acquisition laws; solutions to problems plaguing public-private partnerships, including crony capitalism and delays; and fixing the looming crisis in the banking sector. Macro imbalances cannot be wished away either. Genuine “big bang” reforms are still awaited.

First Published: Mon, September 17 2012. 00:08 IST