The Modi government's resolve on petrol prices hopefully is a harbinger that it is getting ready to press the gas pedal on the unfinished reforms agenda
It is an abiding irony of the Indian political economy that many of the same folks who berate the government of Prime Minister Narendra Modi for not doing enough on economic reforms then turn around and fail to give the government credit when it takes a tough economic decision.
The government’s petroleum products pricing policy (PPPP), which has seen the price of petrol rise to as much as Rs75 per litre at the pump, has earned the ire of members of an entitled and privileged urban middle class—which also happens to dominate the commenting space and the social media—some of whom appear to believe that cheap petrol is an inalienable and divinely ordained right.
Governments need to raise tax revenue to finance government expenditure, and, the world over, choose to tax heavily those goods which are characterized by highly “inelastic" (that is, price-insensitive) demand—petroleum, alcohol, and tobacco, foremost amongst them. In other words, relatively steep taxes on petroleum and “sin goods" follow directly from the principles of optimal taxation theory.
Sound economics it may be, but the politics is not so straightforward. While the government now correctly defends its PPPP, it is salutary to recall that, while in opposition, the current governing party criticized the former government for foisting high petrol prices on an unsuspecting public; and, to make the irony complete, the former governing party has reversed its then correct defence of PPPP and has jumped on the bandwagon attacking the current government.
Be that as it may, the Modi government is to be commended for sticking to its guns and not caving in to the whingeing and whining of a coddled and entitled urban middle class, which happens to be its natural political constituency. Although he was much criticized, Alphons Kannanthanam, a recently inducted minister of state in the Union government, was right to declare forthrightly that it is the well-off who mostly consume petrol and that if someone can afford a car then they can afford to pay higher taxes on petrol. He can be faulted only for a lack of tact but not the correctness of this judgement.
It is my hope that the Modi government’s resolve on petrol prices is a harbinger that it is getting ready to press the gas pedal on the unfinished reforms agenda. For, if the government’s political calculus suggests that it expects no significant blowback from holding the line on an issue that animates its political base, this perhaps suggests that it has found the appetite for other potentially politically unpopular economic policy decisions.
The time is right. In my judgement, the government has a window of about a year, perhaps a little less, before all major political parties start gearing up for the 2019 general election and the reform window will once again close until after the election. With the major one-off policy shocks of demonetization and the goods and services tax (GST) having more or less worked their way through the economy, and with the thumping election victory in Uttar Pradesh having put wind in their sails, there is no reason at this point to delay unfinished reforms.
As a defender of the government’s gradualist approach to economic reforms, it bears repeating that gradualism is not an alibi for inaction.
The corollary to an opportune political window for structural economic reforms is their increasing economic urgency. With gross domestic product (GDP) growth having slowed for six consecutive quarters, a gaggle of respected economists have recently weighed in and argued the case for accelerated Keynesian-style macroeconomic stimulus.
Unconfirmed news reports at the time of filing suggest that the government is mulling breaching its deficit reduction target next fiscal year and spending an additional half a trillion rupees.
There is nothing wrong with a dose of short-run Keynesian stimulus intended to give GDP growth a temporary fillip, if, and only if, it is matched with a clutch of structural, supply side reform measures aimed to boost the economy’s long run or potential GDP growth rate. Only structural reforms can take us toward or above double-digit growth, which now seems more distant than it has for some time. And, on the flip side, Keynesian pump priming in the absence of supply side reforms will only cause the economy to overheat, buying a temporary boost to growth at the cost of higher inflation. And when the growth spurt has petered out and inflation continues to rise, the result will be stagflation—which is not only a poor economic outcome but cannot be good politically for any government.
The Modi government need only recall the unravelling of the Manmohan Singh government in 2014, hobbled by a slowing economy and rising prices, for whom the green shoots of economic recovery came too late to save their political bacon. Singh paid the price for wrongly assuming the economy was on autopilot and delaying reforms until it was too late. Modi is politically too astute to repeat such a mistake.