Change the subject

With the Left losing its stranglehold on the UPA government, big new spaces have opened up in economic policy. Governments are, no doubt, cautious of big reform in their last months, but the UPA should see the great opportunity it now has to show momentum in policy-making and change the subject from gloomy predictions on the political consequences of inflation. Many things that were taboo can now be back on the agenda. The last major achievement in Indian financial sector reforms was in 2001, when rolling settlement was pushed onto the equity spot market. The Percy Mistry and Raghuram Rajan reports have carefully thought through financial sector reforms, India8217;s engagement with globalisation and the macroeconomic policy framework. Roughly speaking, the UPA can now push through roughly three-quarters of the recommendations of the two reports, assuming that the appointments process for RBI works out as successfully as it did recently for SEBI. Many recommendations require legislation. The monsoon session offers a window of opportunity for this.

The worst excesses of fiscal indiscipline have come about in 2008 as the UPA has geared up for elections. The best strategy that they can now adopt is similar to what was done by the NDA with the Fiscal Responsibility and Budget Management Act FRBM. The NDA began the work on FRBM that was three-quarters done when the UPA picked up the baton. In similar fashion, the UPA now needs to embark on far-reaching reform of fiscal architecture and fiscal rules. The impending implementation of the goods and services tax GST is a natural opportunity to implement these changes. The UPA must urgently work in the coming months to do three-quarters of fundamental fiscal reforms, leaving the last quarter for the next government.

The most important missing link in Indian economic reform now is fundamental thinking on expenditure. By and large, the UPA has thus far subscribed to the strategy of sending more money to the ministries of education and health without considering how it would be spent. In elementary education, the task now is of shifting public expenditures towards vouchers, so as to give parents the ability to exert influence on schools. In higher education, the government must start exiting the field. In preventive health care, on issues such as epidemiology and vaccination, a major push is required on public sector solutions. In other areas of health, the key task is that of shifting to a format where providers private or public compete on a level playing field, and only get paid when a customer walks in.