June is the right time for tough reforms

Policy paralysis has costs. Standard and Poor\’s has cut India\’s credit outlook to negative and warned of a one-in-three chance of a downgrade to junk status within the next 24 months. S&P cites the slowing economy, deteriorating balance of payments and out-of-control fiscal deficits.

India\’s problems are eminently solvable. But the government is so lacking in conviction and unable to manage coalition politics that it looks paralyzed. Without action, it will soon get junk status, induce capital flight from India, worsen the balance of payments, worsen inflation and cause a rupee crash.

A year ago, India was boasting 8.4% GDP growth, with analysts predicting it would overtake China in the growth league. Today, growth has slumped to 6.9% and skeptics fear the days of miracle growth are over.

All is not lost. A political window of time will come up in June for tough remedial action that can save the situation. The government must seize the June window boldly, despite attendant political risks.

The logic of the election cycle shows that 2012 is the right time for desirable reforms that will, however, create some immediate losers and invite immediate criticism. The next general election is due in May 2014, so there will be no full budget in February 2014, just a vote-on-account. So, the government\’s last budget will be in 2013, and that will necessarily be a populist budget with giveaways deep enough to be remembered by voters a year later. Tough measures will become politically impossible next year because of the coming election. So, 2012 is the last year in which it is politic   ally feasible to bite the fiscal deficit and undertake painful reforms.

This is why analysts looked forward to this year\’s budget with high hopes. Alas, it was a disappointment. Finance minister Pranab Mukherjee had projected a fiscal deficit of just 4.6% of GDP in 2   011-12, but it turned out to be 5.9%. He pledged to bring it down to 5.1% in 2012-13, but the markets simply did not believe him. Having constantly given reasons why he could not take tough action to check spending last year, he has lost credibility.

His fiscal projections went awry last year because rising import prices for oil and fertilizers sent total subsidies to a record 2.4% of GDP (despite growing arrears of subsidy payments to oil and fertilizer companies). Mukherjee now promises to slash subsidies to 2 % of GDP this year and further to 1.7% within three years, but few believe he has the willingness or clout. The falling rupee is further raising the rupee cost-and hence government subsidy-for imported oil and fertilizers.

Congress cannot control its coalition allies, above all Mamata Banerjee. She has forced the government to retreat on many issues-rise in petrol prices, Teesta waters, FDI in multi-brand retail (that would allow companies like Walmart to enter India).

Second, Sonia Gandhi is by instinct a welfarist and not a reformer. She calls the shots in the party, not Manmohan Singh or Pranab Mukherjee.

Third, opposition parties, led by the BJP, now disrupt and paralyze Parliament in almost every session in protest against one or other measure. In the old days, the protestors would have been expelled but no more. So, the government finds it impossible to do anything controversial just before or during a Parliament session.

Finally, the government doesn\’t dare do anything before a state election that might produce even a few losers-that is politically risky since elections are won and lost on swings of just 2-3% of the vote. So, our polity views reforms as impossible just before or during a Parliament session, and before an election. Some call this realpolitik, but others call it paralysis.

However, the current session of Parliament ends in May, and the next starts only in July. No state election is imminent: the next ones in Gujarat and Himachal Pradesh are due only at the year end. June is the hottest month when politicians leave Delhi (often to go abroad), and political activity falls to its annual low point.

So, June is the ideal time for the government to push through much-needed increases in the prices of petroleum products and nitrogenous fertilizers. Managing the inevitable protests will be easiest in this political low season. Ideally, prices of diesel and urea should be decontrolled. This will cause a temporary upsurge of prices, but should later be offset by a lower fiscal deficit.

Such tough measures alone will bring down the subsidy bill and check the fiscal deficit. They alone will convince domestic and international players that the government is alive and kicking, not just hibernating till the 2014 elections.

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