The Union government’s decisions last week and its standing up to Trinamool Congress (TMC) chief Mamata Banerjeehave raised hopes for “reforms” in the days and months ahead. The government should be supported when it takes right steps, but such hopes should be tempered with realism.
For starters, it is a bit late in the day for the United Progressive Alliance (UPA) government to undo the damage it has inflicted on the economy. The political and economic calculations simply don’t match. The issue can be looked at through the prism of the possibilities of executive action and legislative requirements to revive growth.
The key political economy problem before this government is to undo the “policy paralysis” that has gripped it for almost three years now. The core of that issue is rolling back the perverse monetary and fiscal policy mix that now prevails in the country. Monetary loosening requires fiscal tightening. The UPA has very little political space—even after Banerjee’s exit—to undertake fiscal tightening unless, of course, it takes these decisions fairly quickly.
The assumption behind its newly found empowerment is that with the support of the Samajwadi Party, the Bahujan Samaj Party (BSP) and the Dravida Munnetra Kazhagam (DMK), the government can take the right decisions. It is speculated that the BSP and the DMK have no wish for early elections. Hence, the government has some room for manoeuvre.
This may be true, but the window for such action is very limited. The longer the government delays corrective steps, the more support will weaken. Beyond a point, these parties won’t support steps such as the raising of fuel and fertilizer prices, compression of social sector expenditure and other unpopular steps. After all, they too have to face elections in 2014.
The other important ingredients for kick-starting growth require legislative sanction. For the moment, legislation related to the goods and services tax, and pension and insurance reforms has virtually no political support. It will be impractical and imprudent to bring them before Parliament.
It has been hinted that Manmohan Singh’s government can do a “Narasimha Rao”. This is nothing more than senseless speculation. Rao was a skilled and consummate politician. There is virtually no one in this government who comes close to him in having the skills needed to manage this difficult situation.
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