The paralysed, risk-averse UPA-2 government has suddenly become a risk-taking reformer. Last week it risked defeat in both Houses of Parliament on foreign direct investment in retail. Its victory showed that fortune favours the brave.
For its first three and a half years in office, UPA-2 focused on survival, not performance. Its hairline majority in the Lok Sabha gave partners like Mamata Banerjee a virtual veto. The lady exploited this to the hilt on issues like petrol prices and Teesta waters. The DMK twisted the government\’s arm on the Tamil Tigers. Lacking a majority in the Rajya Sabha, UPA-2 avoided any reforms requiring fresh legislation. So, it gained a deserved reputation for timidity and paralysis.
Meanwhile, it also gained a deserved reputation for corruption. The CAG and Anna Hazare harnessed huge public anger on this count. This led to debacles in the Bihar and UP elections, when Rahul Gandhi truly bit the dust.
It takes a crisis to shift politicians from the status quo to reforms. All reforms create some losers, who are quick to scream. Reforms produce winners too, but with a lag, and the gains are often spread thinly over many people. So, voluble losers usually drown out potential winners.
This changes in a crisis. Suddenly business-as-usual looks like political suicide, so politicians are willing to risk big changes. The foreign exchange crisis of 1991 provided the political motivation for economic reform: business-as-usual was no longer possible.
There is no comparable crisis today. But by mid-2012 UPA-2 faced a triple whammy: a reputation for corrupt paralysis, slowing economic growth, and persistently high inflation (flowing from high fiscal deficits).
Rating agencies like Moody\’s and Standard and Poor\’s had already cut India credit rating to just one grade above junk status. As the economic situation worsened, they signalled a further possible cut to junk status.
Now, foreign pension funds and mutual funds have invested billions in Indian financial markets. Their own rules often oblige them to invest only in investment-grade securities. Had India been downgraded to junk, these foreign funds would have been forced to exit from India. That would have sunk the stock market and caused the rupee to crash to maybe Rs 60 to the dollar. This would have raised all import prices, including that of oil, taking inflation into double digits and ensuring electoral defeat.
This prospect strengthened the hands of reformers like Manmohan Singh and Chidambaram. Sonia Gandhi finally came on board, sharing a public platform on FDI in retail with Manmohan Singh. The message came through loud and clear: timid paralysis was being replaced by reform, despite political risks. This ensured India would not suffer any credit downgrade. Billions of dollars flowed in, and the rupee strengthened.
Next in line is the proposal for direct cash transfers to beneficiaries in 51 districts starting from January 2013, to be extended to the whole country in 2014. This too carries risks. Many glitches are inevitable, so people will not get the cash they are being led to expect. Many deserving people will get left out even as some of the undeserving get cash.
The Congress Party is suddenly gung-ho about direct cash transfers becoming an election winner. Now, these have major potential for eliminating corruption and waste. But this may well take time, and require much more work on opening bank accounts for all and improving checks and balances. To be an election winner, problems in implementation will have to be identified and resolved ultra-fast.
The big picture is that it\’s high noon for risk taking. There is no consensus among political parties on many reforms. But 1991-and the FDI debates last week-teach us that a political consensus is created not by seminars but by risk-taking leadership. A government should plunge ahead, daring others to vote down changes, or reverse those reforms when they assume office.
In 1991, opposition parties swore to reverse the reforms when they came to office. But once the reforms were seen to be working, these parties quietly shelved their objections. Risk-taking leadership by Narasimha Rao created a consensus that mere discussions could never have achieved.
By shifting the public focus debate from corruption to reform, UPA-2 has gained politically. It should now go for reform bills raising FDI limits in insurance, pension funds and banks. Instead of focusing on its own lack of numbers, it should take advantage of contradictions within non-UPA parties. It should start by trying to pass bills in the Rajya Sabha, where defeat is non-fatal for its existence. Any bill that passes the Rajya Sabha will surely pass in the Lok Sabha too.