Tuesday, March 14, 2017

Economic Impact of UP Election


    The scale of UP victory (>3/4th seat share) higher than any statistical analysis based on 2014 LS results: higher than both Surjit Bhalla's (@surjitbhalla) 60% seats and 5forty3's 2/3rd prediction. Political opposition/delaying tactics to Govt's economic policies likely to cease, both in RS and among party & affiliated organizations.  The Union Govt. will Re-Focus on economic objectives outlined in 2014 election manifesto and by the PM & his Govt. in the 2016-17 and earlier budgets. The mandate will allow the Union Govt. to accelerate Policy & institutional reform.

Policy Reforms

The Union government is likely to accelerate policy and institutional reforms that have already been announced by government, whether in the cabinet or in the budget. These include the following:
Welfare-subsidy reform
LPG reforms has made great progress. Govt has suggested at different times that other areas like kerosene, food, fertilizer, employment-NREGA would also be reformed  to eliminate corruption & admin inefficiency to reach benefits directly to poor, farmers & other needy groups.  So far these areas have been pursued very hesitantly and sporadically. Reforms are likely to be expedited so that the funds saved can be used to invest in infrastructure which promotes employment creating growth.

Strategic sales

  Strategic sales & public sector reform (PSUs, AI, ports, railway) reform to stop waste of resources into the sink hole, so funds can be used for infrastructure development. Strategic sale are opposed by vested interests (political, bureaucratic, management, labor) who enjoy the rents from Public sector while the public/tax payer pays the cost. The sweeping victory in UP will make it much easier to deal with obstructions and agitations from such vested interests, and thus accelerate the pace of change.

Labor Reform

  Labor law reforms were reiterated in the 2016-17 budget, in particular the reduction and integration of 44 odd labor laws into four functional ones. UP could also liberalize labor laws to encourage manufacturing, like Rajasthan & other BJP ruled States have started doing. 

Public Sector Bank (PSB)NPAs

        PSB bad loan problem, through decisions on sharing of losses by lender, borrower and tax payer/govt. NPAs whether at the country level or at the international level (e.g. Greece) is less about mechanisms, than about cost sharing than about appropriate sharing of costs between borrower, lender & tax payer.  Any decision will be criticized by opposition parties. However, with the Its hand strengthens by the electoral verdict, the govt is in a stronger position to deal with any criticism. The key here is too take & implement decisions quickly, rather than to search endlessly for a perfect solution (which does not exist) 

Goods & Services Tax (GST)

  The Union Govt. has an opportunity to remove some of the complications introduced at the urging of States, partly because govt did not have a majority in the Rajya Sabha.

Land Reform

   The Government can remove remaining constraints on land acquisition for infrastructure (e.g. through land pooling mechanism). It should also introduce the model land leasing law devised by NITI Ayog.

Foreign Direct Investment(FDI)

   The government has slowly and systematically eliminated unnecessary FDI restrictions and welcomed FDI. Given its announced intention to eliminate FIPB, there is now another opportunity to eliminate all FDI restrictions along with FIPB to encourage shift of manufacturing from newly-highly risky China to India.

Agriculture Productivity

    Allow the introduction of indigenously designed, tested and produced GM seeds followed by other GM seeds already evaluated, tested & cleared by the Indian regulatory agencies, which is so essential for enhancing agricultural productivity and incomes. Expedite removal of perishable goods from the APMC acts & the introduction  of e-markets.

UP administration

     There is also an opportunity to transform UP and consequently the Hindi heartland, by re-establishing rule of law, reducing corruption and accelerating economic growth.  One measure that would greatly facilitate transformation of the development paradigm, is the division of UP into 3 (or 4) separate administrative units, a halfway house to 3 (or 4) separate States. Each major sub-division (West UP, Central UP & East UP) would be under the charge of a deputy CM.  Bundelkhand admin could however be directly under the supervision of the CM. The CM would also act as a coordinator, planner, facilitator & supervisor of all major initiatives. He would also be the node between the union Govt/PMO and the DCM of the 3 quasi States.


      One of the results of the UP election results is likely to be a lengthening the time horizon of the policy options and institutional reforms considered by PM Modi led government from five to ten years. This implies less pressure to produce immediate results (populism) and greater likelihood of reforms that take time to work through the economy to produce visible results in growth and employment . However, the focus will remain on the reforms mentioned in the BJPs National election manifesto and the programs announced so far, with fine tuning based on the 21/2 years of running the union government.  The PMs words and actions over the past 2-3 years also suggests that he is likely to focus much more on establishing his place in history and to discourage some of his hyperactive followers from taking the law into their own hands or engage in violence and thus derail this long term objective.

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