Expert Zone

Straight from the Specialists

Steps the next government should take

April 8, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

India’s economy is tottering, inflation is too high and growth too low. The Congress-led UPA government allowed the economy to drift during its second term. Why? Because it did not focus on real issues, failed to govern effectively and did not carry out any significant reforms.

New legislation became almost impossible, with coalition partners such as the TMC and DMK threatening to pull out (and they eventually did). On top of that, successive scams made it impossible for the government to function normally.

The economy came under stress due to political reasons. To what extent the next government will be able to undertake reforms will depend on how strong the government is. If the BJP and its coalition partners come to power as expected, there is a good chance the economy will turn around. The BJP has managed coalitions well in the past.

The new government will have to immediately address two critical issues. First, inflation has to be brought back to an acceptable level; and second, growth has to be raised to 8 percent to generate employment.

Inflation originates in the agricultural sector, so a second green revolution has to be ushered in with greater attention to horticulture. Restrictions on marketing of agricultural commodities, effective storage and transportation of food products, introduction of biotechnology and new plant breeding techniques and contract farming need to be given priority.

The government’s budget is a mess. Subsidies have been overdone and not properly targeted. In the current year, total subsidies will be over 2.8 trillion rupees. If direct cash subsidies are given to economically poor families as identified under Aadhaar, the outlay required will be substantially less.

A new law makes acquiring land difficult and costly, which will in turn inflate the capital cost of large industrial projects. Alternative ways for compensation will have to be explored.

The BJP’s prime ministerial candidate Narendra Modi says he is committed to minimise government and maximise governance. Under the UPA, governance was neglected with the environment ministry acting as a major bottleneck. Labour laws have become an obstruction to employment and require substantial modernisation. The BJP manifesto refers to inclusion of state chief ministers in “Team India”. This is vital.

A liberal approach to FDI is essential. The BJP does not favour FDI in retail even though it can be a route to lowering inflation and promoting exports. In any case, parameters which define industries in which FDI will be allowed and where permissible percentage of shareholding by foreign investors is set can eliminate case-by-case approval.

In short, the next phase of reforms has to be to be introduced to ensure a sustainable 8 percent growth with price stability. Foreign institutional investors have already sensed the change, leading to an inflow of $3.5 billion in investment since February. If the BJP-led coalition actually forms a majority government, chances are the “India Story” will resume.

 

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