Policy changes after the Maharashtra elections have sent animal spirits and stock markets soaring. Diesel has been decontrolled. The price of natural gas has been revised to $5.61, with a proviso to revise it every six months. Coal blocks deallocated by the Supreme Court are going to be auctioned soon. Earlier, there were some changes in labour laws and the ‘inspector raj’. Optimists gushed about a new reform era.
Sorry, but these reforms are plainly half-hearted. Some may even call them chicken-hearted. Modi is a great salesman, getting a lot of mileage out of minor measures and halfmeasures. But, clearly, he is avoiding radical reform.
That leaves two possibilities. First, that he is by instinct a half-hearted liberaliser, and seeks fast growth through better administration rather than policy reform. After all, he produced rapid growth in Gujarat under the UPA’s overall policies.
Glacial, But Impactful
The second possibility is that Modi does, indeed, have substantial reforms in mind, but believes in gradualism. Radical change may yield large gains, but it also creates immediate losers who can organise strong protests. Gradual change produces fewer short-term gains but also fewer losers, and so, does not stoke protests.
The classic demonstration of this was the raising of diesel prices by 50 paise per litre per month — too small to stoke protests, yet, it meant a substantial Rs 6 rise in price over a year. This policy was initiated by the UPA but followed by Modi. He may have the same approach in mind for other areas urgently requiring reform.
Hesitant First Steps
Take a close look at his reforms so far. He made only marginal changes to the UPA’s interim railway budget and Union Budget, and cancelled the UPA proposal for raising suburban rail fares. True, he appointed a railway reforms committee. But many such railway committee reports in the past yielded zilch. The Jan Dhan Yojana and Swachh Bharat Abhiyan are continuations of UPA policies.
The deregulation of diesel is a major change, but it mainly represents Modi’s luck in the steep fall in global prices. That has made possible deregulation. But diesel was deregulated by the Vajpayee government too, and controls came back when international prices rose. It remains to be seen whether Modi will act differently.
The Supreme Court’s striking down of captive coal blocks provided a perfect opening for denationalising coal. Yet, the government has funked doing that, though it retains the option to denationalise later. Do we need another Comptroller and Auditor General (CAG) report to tell us that open bidding after denationalisation will produce much higher bids than captive auctions?
The price of natural gas should have been decontrolled. Instead, a new formula has been announced that retains price control, and violates the conditions in contracts promising a free market price. The Kelkar Committee’s recommendation — let gas go to the highest bidders — has been rejected. Violating contracts is hardly the good governance Modi talks of, and will inhibit bidding for new exploration contracts that petroleum minister Dharmendra Pradhan hopes to launch.
Columnist Mihir Sharma expresses amusement that “such steps are being sold as great reform, just as a website for inspectors was sold as labour law reform and an electronic attendance register for bureaucrats as administrative reform”. India still has 44 central laws and maybe 100 state laws on labour, and Modi needs to consolidate and scrap most of these. No sign of that, though.
Nods Come to Naught
Lakhs of crores of rupees worth of projects have been cleared in the last two years. Yet, there is no boom in orders for machinery or construction. The binding constraints include the new land acquisition law, the broken PPP model for infrastructure, the bankruptcy of state electricity boards, unrealistic power tariffs, the inability of infrastructure companies already under too much debt to bid for new projects, and ridiculous rules for building permits.
These deep structural problems cannot be tackled through pure administrative improvements. Modi called a meeting of chief ministers on the land acquisition law, which they all castigated. But no follow-up action is in sight. This lack of basic reform is one reason why industrial growth remains slack, and the quarterly results of corporate houses are no better — and often worse — than under the UPA.
Now, some of Modi’s changes will surely yield dividends. But if the economy merely progresses from 4.5% under the UPA to 5.5% under Modi — and even this is now in doubt for 2014-15 — public disillusionment will soon set in. If global conditions worsen, today’s soaring stock markets could crash. Pessimists will say that Modi is running out of time, and half-measures will not suffice.
Optimists paint a rosier scenario, saying the modest changes will slowly but surely boost growth. Optimists say Modi is cleverly introducing major changes but in a phased manner, to avoid opposition to reforms.
There is something to both scenarios. I think clever gradualism may ultimately triumph over inherent half-heartedness. But I keep my fingers crossed.