Before we get into the acts of commission, I would argue acts of omission are equally important. Take, for example, the first Budget. Given the all-round impatience to jump-start growth that greeted the new government, there was a chorus of voices that urged the new government to relax the fiscal stance to boost growth. This would have been a dangerous gamble. It would have stoked aggregate demand, pressured core inflation, widened the CAD and threatened the hard-earned macro stability gains from the last two years. To its credit, the new government doubled-down on fiscal consolidation and didnt change course simply for the sake of change.
Why havent we seen big-bang reform, given the historic election result, goes the common refrain. More fundamentally, how does one rationalise the governments gradualist approach
For starters, much of the heavy-lifting (GST, labour laws, food inflation) involve the concurrent list, for which the Centre has to carry the states along, including the non-NDA ones. This does not lend itself to quick-fixes. Instead, it involves dogged give-and-take between the Centre and the states.
Even for issues that require only central legislative approval (for instance, FDI in insurance), the government lacks a majority in the Rajya Sabha and, thankfully, has chosen to build consensus rather than flex its political muscle by calling for a joint session at the moment. Again, a constraint that precludes big-bang.
More fundamentally, however, reforms involve winners and losers. Typically, losses are concentrated while benefits are dispersed. So, the losers tend to be better organised. The larger the adjustment costs that losers have to incur from reforms, the more the typical resistance to lobby for the status quo. So, big-bang reforms tend to be opposed vehemently, whereas incremental, but sustained, reformswhich may not necessarily excite equity markets, but take the sting out of the oppositionoften have the best chance of success.
Consider diesel prices vis-a-vis suburban rail tariffs and FDI in multi-brand retail. Diesel prices have gone up by 50 paise a month for 20 consecutive months, reducing the under-recovery by R10 a litre. What used to be considered a sacred cow is now business-as-usual. By moving in imperceptibly small doses, the sting has been taken out of the opposition. Imagine the resistance if this happened in two discrete increase of R5 each By spreading out the adjustment costs, policymakers broke down the resistance.Now, compare this to the big-bang announcements of increasing suburban rail fares by 100-200% in one go or going in for FDI in multi-brand retail. These sharp announcements served as rallying points for vested interests that coalesced and forced policymakers to withdraw.
This governments gradualism is dictated by the pragmatism of moving in small steps on sensitive issueswhether on land acquisition (aiming to first simply increase the list of exemptions), or labour laws (asking states to liberalise in small doses), or raising MSPs by just 2% but setting up a committee to reform FCI. And I suspect reforms will be sequenced. So, the push for financial inclusion is, hopefully, a precursor to cash transfers that reduce leakages.
Are there risks to this approach Undoubtedly. First, much of the governments strategy is based on buoyant equity marketsto push through the disinvestment programme, allow banks to raise capital, and facilitate the corporate deleveraging. If the government moves too slowly, equity markets may get disappointed, causing financial constraints to bind and throw things off track. So, incremental reform is fine. But it must be sustained.
Second, political capital is at its peak in the first months of a new government. It will decay with every passing month. So, too much of the heavy-hitting should not be left to the end, when capital is much more scarce.Therefore, the government will have to make some bold decisions along the way. At some point, the Centre will have to flex political muscle at the states to pass the GST legislation or break up Coal India to cater to Indias energy needs. The hope is given its strength in Parliament, it will step up to the plate. But we havent reached that point just as yet. The absence of big-bang should not be confused for absence of reform. It is clear the government has chosen a 100 small steps approach, hoping that markets eventually recognise the whole for the sum of individual parts. This is not a T20. It is a Test Match. And six singles are just as effective, and typically safer, than the occasional six.
The author is Chief India
Economist at JP Morgan