Illustration by Jayachandran/Mint
Illustration by Jayachandran/Mint

The next round of economic reforms

India has a new political geography providing economic reformers a unique opportunity

The Narendra Modi government has taken many welcome steps in the past few days. Diesel prices have been freed. Gas prices have been increased to attract the private investment that is essential for India to reduce its energy dependency. There have been small but important steps towards labour market reforms. The coal ordinance could be an initial move towards eventual denationalization. Direct cash transfers to consumers of subsidized liquefied natural gas are back. There is some discussion on how to restructure the rural jobs scheme.

There is a pattern here. The Modi government seems to be using its political capital judiciously. The focus does not seem to be on the sort of dramatic reforms that many had expected after the national elections. The new gas price is clearly a compromise, and rightly so since a doubling of gas prices would have given a price shock to an economy in which inflation has just begun to drift down. The changes in the labour laws will help loosen the grip that inspectors have on factories but they are still far from easing hiring and firing. Yet, the direction is clear.

The recent flurry of policy decisions comes at a time when there were questions being raised whether Modi could actually convert his impressive rhetoric into action. The splendid rally in equities that began after the first opinion polls showed Modi in the lead had begun to lose momentum. The research reports published by various investment banks over the weekend suggest that the financial markets have once again begun talking about a reforms push.

The first budget of the Modi government lacked policy direction. Much of the initial work done by the new government was administrative, with projects being rescued from the policy quagmire that the previous regime left behind. The work done in the first few months should be seen as the first stage of getting the Indian economy back on track. But that alone could never have sufficed. The recent policy decisions should then be seen as the next stage. The finance minister is out of hospital, a new team is in place in his ministry and two important state elections are over. The months leading to the next budget should hopefully see more policy changes.

Modi has often said that change is possible only if the states partner with New Delhi. Many areas that need policy attention are constitutionally the responsibility of the states. A new report by Neelkanth Mishra of Credit Suisse points out an interesting fact: the election results from Maharashtra and Haryana mean that the Bharatiya Janata Party (BJP) now rules states that collectively account for nearly half of the total output of the Indian economy. The Congress controls states that account for barely a tenth of Indian gross domestic product. Modi has the political opportunity to push through reforms in at least the most important states in terms of economic dynamism if not political heft.

A look at the political map of India shows an interesting new geography: the old divide between the northern and southern states seems to have been replaced by a new alignment of western versus eastern states. The BJP is now the main political force along almost the entire western half of the country, which also happens to be the more economically dynamic part. Another way to look at this new political geography: the BJP now controls almost the entire belt along which then prestigious Delhi-Mumbai industrial corridor is being built. Of course, it has still to form a government in Maharashtra while Delhi, where the BJP is the largest party, continues to be under president’s rule.

The fact that the BJP is now the main political force in the western half of the country—which is also more prosperous and urbanized—provides a unique opportunity for the Modi government to step on the policy accelerator.

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