Now that the uncertainty is over, the real danger is of too high expectations. The decimation of the Left has raised the hopes of many in financial markets, especially in London and New York, that the new government will let it rip on the reforms front. Punters are expecting a full-scale assault on banking and financial reforms, on labour and land laws and perhaps on anything that makes India like Singapore.
This is the time, therefore, to sound a note of caution. Reforms will take place, but not at the pace or in the order of priority that the markets want. Indeed, the absence of Marxists may alert the Congress left to be doubly vigilant about letting the reform bandwagon proceed too fast. This is the significance of Pranab Mukherjee?s appointment. Had it been Kamal Nath or Montek Singh Ahluwalia, the signal for reforms would have been bright green. With Pranab, it is amber.
Congress will interpret the victory as a vindication of the softly-softly approach to liberalisation. It paid the Congress dividends for having worried about rural poor. NREG was opposed by many. I was myself sceptical that it was not yet another wasteful scheme for siphoning off taxpayers? money for party coffers. But by all accounts, it has worked. It did not provide 100 days of employment but, on average, 43 days and largely to women. This is a good beginning on which I am sure the Congress will build further. NREG needs to be studied to see how it can be improved, what impact it has, for example, on the demand for migrant labour and how it can be cleaned up of the many small inefficiencies.
I don?t think the government should raise expectations that it will waive off debts as a matter of routine. Those who paid their debts back have been insulted in favour of the indigent. Any constant expectation that debts need not be paid back will wreck rural credit markets. Similarly, it is one thing to be thankful that the western-style meltdown did not visit the Indian banking system. But it should not blind anyone to the fact that PSU banks are very cumbersome to do business with. In my experience of British, American and Indian banking, I can say that the costs of banking transaction (time taken for a transaction especially) are very high in India. Someone is paying for it, and it is the customer, not the banks. Foreign banks were supposed to get a freer hand in buying up private Indian banks after March 2009. That reform should not be delayed. Indian banking needs competition, not complacency.
Given his West Bengal background and with Mamata Banerjee breathing down his neck in the Cabinet, Pranab Mukherjee will be keen to reform land legislation. Despite my hardline on economic liberalisation, I have never been in favour of SEZs (land scams) or the eminent domain principle under which the state commandeers land. SEZs are an expensive way of evading labour laws that need proper amending. The 1894 Act has cost enough lives in Nandigram and Singur, and elsewhere in Orissa and wherever land has been bought and villages cleared, to be left on the books any longer.
The government must secure property rights in land as a matter of priority. Constitution-makers thought of landowners as being large landlords and had no sympathy for them. Thus, there is an anti-property bias in the Constitution which now hurts the small farmer. The presence of the state in land transactions is an example of government failure that was meant to guard against a market failure. Let land rights be clarified, coded and registered and let all land purchases and sales be a matter of private agents with no state interference.
The logic of labour legislation has been contested on the Congress left but the arguments for it are irrefutable in my view. Rural poverty will not be relieved until India can set up large factories using low-tech equipment to manufacture goods for home market and exports. Many Asian countries have done this successfully. They took the rural poor and put them in factories. This simultaneously raises rural incomes of those left behind as well as incomes of the rural poor who have been given factory jobs. India?s manufacturing growth is ruinously capital-intensive in public as much as private sector. Time has come to make it employment-intensive.
In the immediate context, there will have to be some fiscal package, though this needs careful thought after the two previous packages. But Pranab Mukherjee must be firm about fiscal responsibility. Chidambaram had promised to reduce the deficit by 2009 but he lost the battle at the final hurdle. A firm target must be set within three years?way before the next election?by when the Budget must be in balance. Nothing less will do.
?The author is a prominent economist and Labour peer