Humpty Dumpty got off the wall
Humpty Dumpty went to play ball
The Maharani?s courtiers and
Yuvraj?s men
Said they?d not mess with fuel prices again!
The Opposition rioted; called a bandh for all
But the silliness stopped when
FM stood tall
Whither other subsidies?
What about reform?
Has Humpty Dumpty reverted
to norm?
One does not know; one never will
Is Humpty back on his fence?
Content to be still?
That peculiar nursery rhyme, or some distorted version of it, probably kept resonating in many heads as events unfolded in the first half of July. What to make of UPA-2? Is it a puzzlement or a bafflement, as the musically inclined King of Siam might ask?
UPA-1 went through 2004-09 in a quasi-paralytic state of reform-comatosia. Its accomplishments were the NREGS and the nuclear deal. Not much to show for five years. NREGS is now established. But it is a flawed scheme replete with perverse incentives. These harm rather than enhance the functioning of India?s labour markets at the lowest end of human capital formation. Yet, it seems churlish to quibble. The first step towards a formal structure of income subsidies has been taken. One could go further by embedding such subsidies through a negative income tax and disburse them through the banking system, thus creating more positive incentives and killing two birds with one stone. The nuclear deal was done with avoidable political histrionics that made India look ridiculous on the TV screens of the world. Through political ineptitude UPA-1 embarrassed the US for accommodating India in such unprecedented fashion. Not the best way of treating an important strategic ally that India needs (and must have) to deal with China as this century unfolds. The Opposition was largely to blame for that. It will pay the price if it is ever in government again?which for the sake of Indian democracy, one must hope it will be. But UPA-1?s floor management of the nuclear Bill left much to be desired.
Under UPA-1, the Congress blamed its Left coalition allies for hamstringing its ambitions for galloping reform. Believing Congress, the Indian electorate punished those ?allies? for compromising India?s growth by blocking reforms under UPA-1. In May 2009, the electorate gave the Congress an almost free hand to pursue what it claimed it could not do before. But what has UPA-2, with Congress and the PM firmly in drive position, done since?
For 13 months, virtually nothing except posture at G-20 meetings. The PM has mused publicly about India soon emulating China?s growth performance. May there always be sugar in his mouth.
But, his non-performing Cabinet (Finance and Home being exceptions) has shown convincingly why that dream remains sealed in its pipe for the foreseeable future.
Now suddenly, as if to prove everyone wrong about its somnambulistic streak, UPA-2 has opened the floodgates on reform of price subsidies. It has tackled an issue debated for three decades?reforming fuel price subsidies that the fiscus could never afford. That is to its credit. But, has it done so as a one-off parlour trick to keep credible critics at bay? Or is it the first strategic step towards establishing an overdue symmetry between: (a) systematically withdrawing all price subsidies, not just for fuel but for food, fertiliser, and all manner of things, resulting from the absurd economic legacies of the past, and letting markets work as they should?especially for the big prices like the price of energy, food, domestic money and foreign money; and (b) simultaneously increasing income subsidies in keeping with fiscal affordability, while minimising embedded perverse incentives in discouraging honest work on the part of the able but unwilling, as well as preventing the siphoning of these funds by middle-men.
It is impossible to tell as yet whether this is a strategic move or a diversionary tactical manoeuvre on the part of UPA-2. One hopes it is the former. The timing raises eyebrows. It follows on the heels of a prolonged period of inflation?especially food price inflation which hits the poorest hardest and causes the most public anxiety in India. Of course, the question remains as to whether such inflation was caused by an unforeseeable supply-side shock due to a poor monsoon in 2009 as alleged by UPA-2. Or was it caused by simple negligence on the part of an agriculture & food ministry whose leaders seem more preoccupied with playing cricket shenanigans and banning the use of commodity derivatives that might have played a useful role in hedging against the food price spikes that occurred had they been deployed intelligently?
Perhaps it is asking too much for an Indian agriculture ministry to understand how to deploy such sophisticated financial instruments to achieve such purposes. But they can and do. Other governments in other countries let private operators in the food production industry deploy them all the time to keep their own price risks stable. If the agriculture ministry?s leaders spent more time on understanding how that was done, and less time on cricket and party politics, the extent of the inflation experienced by poorer Indians might well have been moderated.
Sadly, one distrusts the instinct which argues that UPA-2 is awake and on a strategic roll towards reform if only because profound economic illiteracy has become a hallmark of the mental make-up of the Congress leadership. It should now be apparent to the Indian electorate that it is the Congress leadership that poses the real opposition to reform in India rather than parties outside the Congress camp. And this despite the fact that UPA-2 embraces three of the best economists and reformers in India (or any other country for that matter) in the form of the PM himself, the DC-PC who is his right hand, and the chairman of the PM?s Economic Council who is his left. But their collective wisdom and intellectual firepower seems insufficient to counter the deadweight of economic ignorance that seems to have become encoded in the DNA of the dynasty that commands the Congress.
(To be concluded)
The author is an economics and corporate finance expert