The Government’s unexpected policy blitzkrieg has been forced both by economic as well as political compulsions.
Policymakers usually respond to slowdowns by taking recourse to various fiscal or monetary stimulus measures. In India’s case today, the Government’s perilous finances rule out the first, while persistent inflation makes monetary easing, too, difficult beyond a point. But there is a third option: ‘Supply side’ policy stimulus that aims at revival of investor sentiment through a strong demonstration of the Government’s commitment to reforms. This is precisely what the ruling Congress-led alliance has sought to do by steeply hiking diesel prices and capping the number of subsidised LPG cylinders per household; allowing global supermarket chains to operate in India with majority ownership; permitting overseas airlines to take up to 49 per cent stake in domestic carriers; opening up direct-to-home and digital cable network services to 74 per cent foreign direct investment (FDI); and clearing partial sale of governmental equity in four state-owned companies. The fact that all these decisions came within a 24-hour space shows the Government’s intent to loudly proclaim to the world that it is no longer gripped by policy paralysis.
To be sure, there is economic sense to each of the above moves. The alternative to a diesel price increase was to allow oil companies to bleed to death. Permitting a Walmart or Tesco to open stores is largely a matter of choice. If West Bengal does not want these chains, it can simply deny them a shops and establishment license or sales tax registration number. But if Haryana or Rajasthan feel the entry of foreign retailers would expand the universe of buyers for farmers’ produce, how can West Bengal object? The latest decision merely enables Haryana to go ahead, while respecting West Bengal’s right to keep out Walmart. As regards airlines, the extant policy already permitted 49 per cent FDI. At the same time, foreign airlines could not invest, benefiting neither consumers (who are better served by an entity that knows the business) nor promoters of local carriers (who would want a wider choice of buyers for selling out their stakes). It is good that this bizarre exclusion has now been done away with.
But what accounts for this sudden late burst of reform activity, much in the manner of a pinch-hitter trying to make up for a poor run-rate? A deepening slowdown, plus the limitations of addressing it through conventional fiscal and monetary policy tools, is an obvious economic explanation. But politically, too, a series of scam revelations have put the Government on the backfoot, so much so that it stands to lose little by doing things the Congress party is not naturally inclined to. “If we have to go down, let’s go down fighting” is something the Prime Minister, Manmohan Singh, himself is said to have emphasised. In any case, good economics makes for good politics in the long run.