The new government must combine its mandate and its legacy to improve its record of delivery.
With the Congress party winning about 200 seats on its own and the pre-poll UPA coming close to 260, hopes that the new government will be both stable and govern effectively have soared. The combination of a near-majority in the new house and the continuity of broad objectives, strategies and leadership certainly improves prospects of moving forward on many fronts on which progress had stalled during the UPA’s first tenure. Of course, the political environment in India is always uncertain and the best laid plans of a well-intentioned government can always be disrupted. But, for the moment, this is an unmatched opportunity to move from plans and intentions to execution and delivery.
This is clearly the strongest mandate that any government has received since 1991 and it is not coincidental that the state of the economy was the most significant concern on the eve of those elections as well. This puts economic management on centre stage and the government is going to be held to very high standards with respect to the speed and effectiveness with which it restores the economic momentum that we saw during the first four years of its just completed term.
This requires an equal emphasis on both short-term compulsions and long-term drivers. The first visible act by the government is going to be the allocation of portfolios. Apart from the foursome of home, external affairs, defence and finance, several other ministries have come into focus because of their pivotal role in facilitating and accelerating growth and development. In a coalition in which political weight is more widely distributed across partners, the risks of these being allocated on the basis of political compulsions are high. This mandate gives the government an opportunity to allot important portfolios to people whose objectives are reasonably aligned with the development agenda.
No one would argue with the assessment that three of the most critical bottlenecks to rapid and inclusive growth are in the power, transport and education sectors. In all of these, capacity is woefully short of demand. Reforms to change the incentives for new investment have been put in place, but the demand-supply gap continues to grow wider by the day. I would argue that perhaps the greatest economic failure of the previous government was its inability to generate and sustain momentum in these three sectors.
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Having the right people in place is key to rectifying the problem and the country simply cannot afford another five years of inaction. Done transparently and on the basis of proven merit, portfolio allocation can significantly enhance the government’s ability to live up to heightened expectations. It will also help to provide incentives and rewards to a new generation of leadership within the party, people who have shown promise but who could not be accommodated with a coalition arrangement.
By far the largest dividend from continuity comes from the archive of policy analysis and recommendations that this government inherits. The UPA government was often criticised, even ridiculed, for the large number of commissions and committees that it set up early in its tenure. The fact is, though, that many of these have put together substantial reports with solid recommendations for addressing many serious problems that the economy faces. One may or may not agree with all the recommendations, but, taken together, no government could have come into office with a better blueprint for action.
Several reports by the National Knowledge Commission suggest ways to get the education system at all levels back on track. Issues plaguing the manufacturing sector are addressed by reports produced by the National Manufacturing Competitiveness Council. There were committees that made suggestions for petroleum pricing reforms and financial inclusiveness, which was also addressed along with several other financial sector issues by the Committee on Financial Sector Reforms.
One could go on; the point is that the government starts with a huge advantage in getting its economic programme started. It has to very quickly create or reinforce internal review and implementation mechanisms to follow up on the huge body of action plans that are on the table.
From the short-term perspective, the presentation of the budget for 2009-10 will give the government an opportunity to assuage concerns about the rather threatening fiscal situation. Disinvestment is an immediate channel for raising funds, which must be considered. The revival in equity markets, which is expected to strengthen in response to the strong mandate that the government has received, will help to mute the usual criticisms about underpricing. Reforms of subsidy mechanisms, which improve delivery while reducing costs, must also be given priority.
The bottom line is that the government must create enough room to increase spending on the critical areas mentioned above even as it does things to assure foreign investors about the soundness of its economic strategy. The return of foreign investment inflows, even as it is some way off, is itself going to be influenced by the steps that the government takes in the mean time. Restoring fiscal health is key to this.
In sum, both in terms of mandate and legacy, the new government is well-positioned to put its “faster and more inclusive growth” agenda into action. But, let’s not forget the flip side of a strong mandate. The last time the Congress Party did relatively well in the elections was in 1991. Its reforms ran wide and deep, the benefits of which the economy is still reaping today. But, it lost the next three elections before emerging as a partner of a weak ruling coalition. And yet, despite its rather sparse achievements on the reforms front, it came back stronger.
Different lessons can be drawn from this apparent paradox. Here are two. First, the constraints imposed by opportunistic coalitions are being seen by the voters as hindering governance. A more decisive mandate means that this excuse is no longer viable and the standards of accountability will be much higher next time around. Second, the choice is not between reforms and status quo; it is driven by perceptions of improvement in the overall quality of life. The debate on reforms has to move from abstract notions like “markets vs. the state” or “foreign vs. domestic” to simple functional and utilitarian criteria: “Will life improve for a large number of people as a result of reforms?” That is, ultimately, the record on which it will go to the voters with in 2014.
The author is Chief Economist, Standard & Poor’s Asia-Pacific. Views are personal.