Will Political Uncertainty Gut Economic Reforms?

The withdrawal of the DMK from the UPA coalition government has raised questions in the public mind about the longevity of the government and the effect on the chances of passage of Economic reform legislation.   My tentative answer is possibly, but it could paradoxically also help in expediting some (real) reforms if managed skillfully.

Early Election?

The first question on everyone’s mind is whether the DMK withdrawal heralds an early election.  It does not appear to be in the interest of the DMK and the BSP to have an early election, because their opponents, the AIDMK and the Samajwadi Party (SP) respectively recently swept the State elections and are likely to win the corresponding Lok Sabha seats.  Thus an early National election increases likelihood of the DMK and BSP loosing many of the Lok Sabha seats they currently hold.  Given that the serious corruption charges against former Telecom minister A Raja(of DMK) and others in the DMK are still fresh, it is in their interest to give time for them to fade from public memory. 

The puzzle is, however, why the SP has not tried to pull down the UPA Govt. and why the TMC has become hesitant?  A few possible explanations come to mind.  One, that they need more time to recoup their State election costs and generate enough funds to fight the National election. Two, that this period of uncertainty could be used to extract concessions on legal cases and prosecutions. Three, that they need fiscal indulgence from the center and fear the next government may be less forthcoming.  The first two perhaps apply more to the SP and the last to the TMC.  On balance therefore, the DMK withdrawal, does not per se affect either the calculus of these parties or the probability of an early election.

End of Policy Reforms?

What about the effect on economic reform legislation?  The conventional wisdom on economic reforms is that political uncertainty slows down reforms, as opposition parties oppose any action that they can project to potential voters as “ant-people”. This argument, perhaps applies to expenditure (subsidy) policy reform but less to issues where old ideas or ideology play a role. If parties are looking to parley a positive vote on a bill, for favors for their leader, party or State, the government may also have greater opportunities for bargaining to pass reform bills. The current political uncertainty could be used to accelerate genuine economic reform (i.e. reform that restores growth and improves the efficiency of welfare delivery).  The likelihood of Narendra Modi becoming the BJP/NDAs candidate for PM has created uncertainty for its current and potential allies.  For instance Nitesh Kumar’s, JD(U)s public feelers to the Congress regarding ‘Special category status for Bihar,’ and Mulayam Singh’s hints that he could do business with an L. K. Advani led BJP (NDA PM) are indicators of this flux.  If handled skillfully, this could provide the Congress a counter opportunity to accelerate the reforms.

         The Congress led UPA government has repeatedly stated that it has a majority and will remain in power till the due date of the 2014 election.  Despite the optimistic GDP projections in the Economic Survey and in the 2013-14 budget, growth is likely to be around 6% (+/- 0.5%) in terms of GDPFC and between 5% and 6% in terms of GDPMP.  Thus it is critically important for the Congress to end its current term with an uptrend in growth that is visible and credible, and this is only possible if there is another spurt of reforms over the next six months.  The FMs recent statement about formulating and accelerating next generation reforms is an indication.  However, most of the financial sector reform legislation as well as the GST and perhaps even the DTC depends critically on BJP concurrence if not support.

Finding Convergence

        Why should the BJP support this legislation?    First, it gives the BJP an opportunity to redeem itself in the eyes of former and potential Urban BJP voters who were thoroughly disillusioned by the BJP’s unthinking opposition to economic reforms that support investment and growth.  A BJP spokesperson has stated that the country is now in an election mode.  Earlier BJP leaders have asserted that Congress would be thrown out of office during the next election. If the BJP truly believes in these two statements, then it is in its interest to expedite reform legislation in Parliament and vote to pass it.  There are two reasons for this.  Firstly, these reforms are critical to India growing at 8% during the tenure of the next government (whether it is Congress led or BJP led or a third front) and second that Congress is likely to oppose the same reforms if the BJP in power, just as the BJP in opposition has opposed reforms that it introduced when it was in power. 

Bold 

     As both parties need some time to consolidate their support base and organize their aprties (under the leadership of Narendra Modi and Rahul Gandhi respectively), they have enough time to co-operatively pass such legislation before getting into a full-fledged election fighting mode. The Parliamentary affairs minister therefore has two important tasks before him: Get the budget and the finance bill approved and work out with the BJP leadership the changes in reform legislation needed to get their immediate approval.

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A version of this article appeared as Op Ed in the Times of India on March 26, 2013.