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Budgeting for the mandate

By Subir Gokarn
June 15, 2009 13:12 IST
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There are several similarities between July 1991 and July 2009 on the economic and political fronts. The economy is not doing too well, relatively speaking, a state to which global conditions have contributed significantly.

A general election has, to many people's surprise, thrown up a ruling coalition that is dominated by a single party, similar to the configuration that assumed office in 1991.

The Budget presented by Dr Manmohan Singh in July 1991 completely changed the economic landscape, initiating changes whose benefits are still being reaped today. For a pro-reform constituency denied their desired policy measures for so many years, this may seem like a perfect opportunity to get the reform process back on the rails.

Of course, political calculations may lead to somewhat different conclusions. The big-bang reforms of 1991 and a couple of years afterwards could well have contributed to the electoral reverses that the Congress experienced in state assembly elections in the mid-1990s, before going on to lose the 1996 general elections.

By contrast, after five years in office, during which the United Progressive Alliance was generally seen as doing very little by way of reform, it came back to office even stronger. A logical, even if simplistic, inference to draw from this comparison is that it is political suicide for a ruling coalition to be strongly identified with a reform agenda.

If this is the thinking that prevails within the Congress, the pro-reform constituency is in for some disappointment.

However, I think the UPA needs to reach a more sophisticated understanding about the reasons for it getting a second term in office. Further, its policy and public expenditure decisions must flow directly from this understanding.

It is obvious as to why a reform agenda faces such political resistance and resentment. There is a perception of re-distribution of benefits. A politically powerful group sees itself as being worse off than before, with the gains from reforms having been usurped by some other group.

Equally likely is the perception of asymmetry. Everybody benefits to some degree, but the distribution of benefits is clearly skewed in favour of some groups. Looking back over the past two decades, the second scenario is perhaps a more accurate way of characterising the Indian experience, but the first plays an important, and occasionally dominant, role in political debate.

The first thing the coalition needs to do as the government machinery works on the Budget is to convince itself that "reform" is critical to its ability to deliver on the promises it made during the campaign and which it cannot simply assume that voters will forget about when the next elections come around. Examples abound, but let me cite two significant ones.

Over 10 million jobs a year will simply not be generated without labour market reforms. The capacity of the banking system to increase its coverage of less profitable customer segments in pursuit of financial inclusion will be hindered by the relatively small size of banks, which implies that consolidation is a pre-requisite for effective inclusion. And so on.

The second factor to consider -- and in this I believe lies the crucial difference between the 1991-96 period and the 2004-09 period -- is the policy swing towards re-distribution. It is largely correct to infer that the UPA won re-election because of schemes like the National Rural Employment Guarantee SchemeĀ and other directly re-distributive measures.

But, it is incorrect to conclude that this alone was decisive and the fact that the economy grew by close to 9 per cent per year for the first four years of the government's term was irrelevant.

If one accepts the argument that the rapid growth itself was in large part a dividend from past reforms, the political implications become clearer. The contrast between 1991-96 and 2004-09 need not be seen in terms of the trade-off between reforms and political success.

The more appropriate way to see it, in my view, is that resistance to reforms can be overcome by the perception that a reformist government is taking concrete steps to mitigate the adverse impact of reforms and to ensure that the benefits flowing from them are more evenly distributed.

From this perspective, the first UPA term can be viewed as a kind of re-balancing, even atonement. It apparently helped to restore the Congress's credentials as an inclusive party from the damage caused by the reforms undertaken in the early 1990s.

Voters have seen for themselves the benefits that the new economic policy framework generated. They just need to be assured that they will have a shot at these benefits and will not be left to fall through the cracks if they fell short.

The NREGS and other safety net programmes like the unemployment fund recently proposed by the Prime Minister's Economic Advisory Council, will help to build that assurance. But these mechanisms are not just ends in themselves.

They will play a crucial role in enhancing the political salability of reforms that may, in the short term, harm some interests but will contribute to sustained growth and employment generation over the long term.

The government must use the credibility it draws from its first term on the inclusiveness agenda to re-activate and energise its reform agenda. On the one hand, it needs to offer concrete solutions in sectors in which massive investments are needed, without which the rates of growth that people have come to expect simply cannot be sustained.

On the other, it needs to move beyond the first level of inclusiveness, represented by the safety nets, to providing education, skills and jobs.

To my mind, the complemetarity between these two objectives has been demonstrated by the outcome of the recent elections.

More and more, an enduring political strategy will depend on the ability to bring together two previously conflicting constituencies: those who can exploit the opportunities provided by rapid growth and those whose interests are protected even if they cannot do so.

The Budget that will be presented in early July cannot, therefore, confine itself to closing the fiscal deficit while increasing resource allocations to priority activities. Like in 1991, it must set in motion a series of substantial and irreversible changes in the way in which government actions impact the economy.

Unlike in 1991, such changes must be targeted in equal measure on both growth and inclusion.

The author is Chief Economist, Standard & Poor's Asia-Pacific. Views are personal

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