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Dual reforms policy to continue

india Updated: May 20, 2009 00:45 IST
Vir Sanghvi
Vir Sanghvi
Hindustan Times
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Some of the commercial euphoria that has greeted the UPA victory is based on the sense of relief the country feels at finally having a stable, Communist-less government in place. But some of it also stems from the perception that this is going to be a reform-friendly government.

That perception is accurate. But proponents of this view use reform in a variety of senses and on Dalal Street, reform is seen as being limited to the financial sector. That may be a mistake.

There are three kinds of reforms that this government will probably look at. The first are the systemic reforms that affect all of India. Education is certain to be a priority and there will be far-reaching changes. Similarly, there will be more schemes like the NREGA and various social welfare reforms seem inevitable.

The second is governmental reform. The reports of Veerapa Moily’s Administrative Reforms Commission are gathering dust. But nearly everybody who’s read them agrees that Moily’s suggestions (more judges, promotion on merit in the civil service etc) make a lot of sense. The government is likely to consider implementing some of the proposals.

The third category is economic reform. Even here, the term ‘reform’ is misleading. Nobody objects to measures that remove bureaucratic obstacles and unleash the entrepreneurial energies of the Indian people. Such reforms are non-controversial. On the other hand, an overhaul of labour laws, which India desperately needs, could be controversial and it is still not clear if Manmohan Singh will bite the bullet.

Then there are the reforms that affect foreign investment. During the life of the last government, Singh pushed for a rise in permissible limits of foreign investment in various sectors over the objections of the Left. His argument was that there was only a small window for India to attract the kind of foreign investment that was required to sustain growth.

That argument seems less compelling now that many potential investors are either battling bankruptcy or liquidity crises of their own. Even so, the Left’s objections were often petty and meaningless. For instance, if you allow 26 per cent foreign investment in a sector, then how much difference does it make if you raise the limit to 49 per cent? With the Left out of the picture, some of those limits will go up though it is too late for them to have had the impact they would have three years ago.

But those investors on Dalal Street who are celebrating the exit of the Left and believe that we are entering a new capitalist era are likely to be disappointed in the medium term.

The Congress, as a party, is deeply suspicious of the market’s ability to deliver prosperity on an equitable basis. It always points to the example of Chandrababu Naidu who was routinely feted by the CII and hailed as a potential prime minister even while farmers committed suicide in the state. Babu lost the election last time and this time around the TDP has been badly mangled.

It is no secret that there were always two strands to the UPA government’s thinking. On the one hand, there was Singh’s belief in market forces and his disapproval of direct interventions and subsidies. On the other, there was Sonia Gandhi’s view that India’s poor needed to be shielded from the vagaries of the market and given the benefits of prosperity that the market refused to share with them.

That double-headed approach will continue. Congressmen believe they won this election because of the NREGA and the write-off of farmers’ loans. They point to the example of the petroleum ministry, which used the administered price mechanism to protect consumers from the greed of global oil speculators. Even when the world price of crude oil touched $145 per barrel in July 2008, the government ensured that Indian prices remained within the reach of consumers. And when the speculative bubble burst and global prices fell, the petroleum ministry actually reduced prices.

This success came in the face of Singh’s repeated insistence that the administered price mechanism be dismantled and the volatility of global crude oil prices be reflected in the rates charged to Indian consumers. In purely economic terms, Singh was absolutely right: all subsidies create distortions in the market and cost a lot of money. But in terms of social justice — to say nothing of political logic — Sonia was probably right to insist that India’s poor be shielded from the havoc created by global speculators.

It is such successes as the petroleum ministry that lead Congressmen to believe that while it makes sense to remove bureaucratic impediments and welcome more foreign investment, this government cannot put its faith entirely in the market.

Fortunately for them, the crisis in global capitalism supports their view.

So yes, this will be a government of reformers. But it will not be run for the benefit of Dalal Street or the CII.