Wednesday, Feb 01, 2023

The next 100 days

Who will rule India,and will they undertake economic reform? An anecdotal forecast

The curfew tolls the knell of parting day… And leaves the world to darkness and to me.” In thinking about post-election India,Thomas Gray’s words keep haunting me. Perhaps because this poem was titled “Elegy” and we are talking about an elegy for reforms. Perhaps because,in a different poem,Gray wrote,“where ignorance is bliss,’tis folly to be wise” and that’s what assorted election manifestos are about. Perhaps because “Elegy” talks about “some mute inglorious Milton” and while there are glorious political uncertainties,there are inglorious economic certainties. Conceptually,there can be the following configurations: (1) Congress government; (2) BJP government; (3) Congress-led government; (4) BJP-led government; (5) Third Front,supported by the Congress from outside; (6) Third Front,supported by BJP from outside; and (7) Third Front government. One doesn’t need psephology to figure out Congress + BJP will add up to 280 seats or thereabouts. And clearly,neither Congress nor BJP is going to wither away. (1),(2) and (7) are therefore out. We are left with (3),(4),(5) and (6) and opinion polls,masquerading as precognition,will not get us any closer to which of the four is most likely,since quite a bit hinges on which is the largest party or largest alliance and subsequent exchange of one kind of portfolio for another.

Across psephologists,we have modal numbers like: Congress (135-150),BJP (135-145),SP (23-30),NCP (13-14),Trinamool (13-17),RJD-LJP (15),Shiv Sena (12),AGP (4-5),Akali Dal (4-5),DMK and allies (13-15),BSP (26-34),AIADMK and allies (30) and Left (35-40). That leaves the field wide open,since some incremental parties will not sleep with the enemy. Consequently,definitions of UPA and NDA are fungible. All one knows is (3) and (5) are a bit more likely than (4) and (6). However,there is greater certainty in the economic domain. The RBI has just told us the economy will grow by 6 per cent in 2009-10. The chief economic adviser has suggested a band of 5.5-7.5 per cent,which is so wide it is hardly illuminating. But,to be fair to the CEA,the upper part of the range is conditional on the US economy bottoming out by September,an unlikely event. Without this,the band is 5.5-6.5 per cent. And neither the RBI nor the CEA will vehemently disagree if one breaks up 2009-10 growth into 5.5 per cent for the first half and 6.5 per cent for the second half. From October 2009 we will thus settle into a trajectory of 6.5 (down from 8.5 per cent) and remain there until the world economy and exports perk up.

What do we expect the incoming government to do,so that the trajectory becomes 7.5 per cent rather than 6.5 per cent,or recovery occurs before October? Big-bang reforms should occur in the first 100 days before steady-state resistance takes over. On economic reforms,the UPA flaunts NREGA and RTI. RTI was pushed through during that window and though NREGA was formally launched in August 2005,the decision had already been taken during the first 100 days,when the National Advisory Council still possessed some bite. During 1991-96 too,significant reforms occurred during the first 100 days. However,this 100-day hypothesis isn’t quite true of either the UF or the NDA. Does that validate a hypothesis that steady-state resistance to reforms is greater under Congress? With (3),(5) or (6),incremental allies will stonewall enough to jettison all

reforms. The first 100 days won’t shake India,except with (3),we might have a Right to Food Bill.

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This isn’t simply a matter of National Common Minimum

Programme (NCMP) or National Agenda for Governance (NAG). It is true common minimum is more highest-common-factor than lowest-common-multiple and is thus a common maximum programme that becomes a binding constraint. However,not all reforms require legislative changes. Even within NCMP constraints,reforms are possible. Was it because of the NCMP that the roadways programme collapsed under the UPA? Was it because of NAG that it took off under the NDA? Administrative decisions are often determined by ministers and it is here that collateral damage by incremental parties is greatest. With (5),a fairly likely scenario is defence with SP,home with RJD,mines,petroleum and fertilisers with LJP and JMM,commerce and telecom with DMK,agriculture with NCP. And who knows? Perhaps the historic blunder of a PM from the Left and even finance with an incremental ally? That’s the reason a 6.5 per cent trajectory is independent of any Central government

action,within and without 100 days. It’s a function of monetary policy loosening and fiscal measures already introduced and the steam of entrepreneurship. (Though it’s true rural sector reforms are important and can provide endogenous sources of growth.)


However,these reforms are state subjects. And if one means substantive rural reforms and not just hikes in procurement prices or a Right to Food Bill,the experience of the last five years doesn’t suggest they are likely under (3). The likelihood is greater under (4). Nor should one forget the fiscal mess. The RBI has just told us that the overall (Centre plus states) fiscal deficit is 10.8 per cent of GDP,excluding off-budget items; just as Chidambaram told us he was pressing the “pause” button on FRBM. On most keyboards,the pause button is also a “break” button. Given existing government borrowing programmes for 2009-10,FRBM has been broken in spirit. Additional public expenditure

demands under (3),(5) and (6) could break it in law and return us to automatic monetisation of deficits. The cycle of high interest rates can’t be broken. No one will touch rates on small savings and deposit rates will have a floor of 8 per cent. Priority sector lending will be at 4 per cent. How can one expect PLRs to drop below 11 per cent,even if RBI rates are cut more? With (3),(5) and (6),we are unlikely to get privatisation of PSUs too,not just on efficiency grounds,but also to bridge deficits. Privatisation is more likely with (4).

This is realism rather than pessimism. Policy responses to downturn can be fiscal,monetary or structural. On structural,there is thus glorious uncertainty about nothing significant occurring. Public expenditure isn’t the point,even in infrastructure. The problem isn’t resources,but administrative


capacities of government systems to deliver. One would like to think those reforms are more likely under (3) or (4),except that the last five years of (3) don’t inspire confidence. Back to Gray — many a reform idea shall “waste its sweetness on the desert air”.

The writer is a Delhi-based economist

First published on: 23-04-2009 at 00:27 IST
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