The lack of trust in statements at the highest level - including by Prime Minister Manmohan Singh himself - that there are no plans to impose harsher controls on the capital account should cause the prime minister, his government and his party to pause and consider their options. It is largely because of a lack of trust in the government's assurances - born of a series of broken promises and over-optimistic assurances that growth is about to return, or that growth-enhancing measures are about to be taken - that the financial markets have chosen to react so badly to various global and domestic pushes. The thinking of market participants is clear: there is little hope of the India growth story reviving over the next few months to a year, and so being locked into India in that time would be an error. Further, it is clear that any revival is predicated on a series of troublesome policy actions. Few observers are willing to give the government the benefit of the doubt with any policy that appears to be a stopgap, temporary response; unless the fiscal deficit, the investment shortfall, and the current account gap are addressed and corrected as structural problems, capital will continue to lose faith in India.
Thus, structural reform, rather than temporary measures, must be announced, or the precipitous decline in the financial markets seen will only be the beginning of more lasting and broad-based pain in the economy. Yet it is widely assumed that the government will be unable to take any of the tough measures that are essential. For one thing, fuel and fertiliser subsidies will continue to grow in magnitude as the rupee declines in value. They must be reduced, and a depoliticised mechanism that links them to the world price of petroleum products has to be introduced. But, it is argued, such a step cannot be taken in an election year. Nor, apparently, can crucial growth-enhancing reform, such as changing problematic labour and land regulations, be carried out while India is in election mode. The next Budget will be presented not before July 2014, assuming elections are held next May in the normal course, but that wait could be long and costly. Also, the Bharatiya Janata Party has given every indication that it will not permit even rational steps towards reform in the time that remains with the United Progressive Alliance. Nor has the UPA, appearing ever more tired of its nine-plus years in power, put anything radical on the agenda before elections. But India is spiralling downwards and is in danger of losing the confidence of the world, which is what sustains its ambitions. It cannot wait while this election process plays itself out till the middle of next year.
There is only one way out, therefore: the UPA government must declare elections early. Since it does not have the bravery to take important steps while weathering criticism; and since it will be unable to fashion a mature political consensus on what must be done; and since the pronouncements of its leaders carry little assurance among economic actors, its continued existence does more harm than good. Since the Congress will be incapable of taking such a step without calculating its own self-interest, it should remind itself that the longer that Narendra Modi has to consolidate his hold over the Bharatiya Janata Party, the better that party could perform. Whatever the reason, the UPA government must call for early elections.
