Global credit rating firm Moody’s has flagged growing concerns about the risk of policy stagnation and sluggish reform momentum in India in the backdrop of a weakening of the rural economy, which it says is credit negative for the country. The rating firm’s assessment shouldn’t come as a surprise. Much of the recent commentary on the economy has been on the slow pace of change despite an impressive political mandate and improved macroeconomic indicators. If investors, local and overseas, and rating firms appear to be fretting now, it has in no small measure to do with the fact that there have been hardly any bold moves on, say, divestment, pruning subsidies or repairing the balance sheets, especially of state-owned banks.
The government has little to show in terms of its report card on reforms in the one year that it has been in office. The changes have been confined to only two areas — diesel decontrol and rationalisation of minimum support prices — with the government getting bogged down in several controversies, while simultaneously losing political capital. Add to that a lack of communication on key issues. In these matters, in the squandering of political legitimacy, it can be said that the NDA government currently appears to show shades of its predecessor, UPA 2. The more the government does so, the more challenging it will be to increase the momentum on reforms. It needs to be kept in mind that India has so far been relatively insulated from the headwinds blowing across the world — be it the troubles in Greece or sluggish global economic growth — and it has had a bit of good fortune in the form of low international crude prices.
It is only natural for an incumbent government to portray and project an image of business-as-usual. Finance Minister Arun Jaitley has indicated in the past that reform is not all about big-bang moves and that it is the art of the possible. Surely, it should interest Jaitley and his policy managers that almost half of those who responded to a poll conducted by Moody’s identified sluggish reform momentum as the greatest risk to India’s macroeconomic story. NDA 1, of which the finance minister was a part well over a decade ago, used to talk of narrowing the gap between expectation and execution. Given the wave of expectations built up by this government, it will continue to be tested on delivery. Increasingly, however, with patience wearing thin, there is a risk of the government being perceived as UPA 3. It needs to move fast if it wants to dispel that impression.