According to an Arabian tale, on a cold night, a freezing camel begged and received permission to insert its nose into its master’s tent. As the night progressed, the camel stealthily made its way in completely.
Optimists are hoping that India’s reforms have a similar fate—gradually adding up to a lot and enabling the country to meet its potential.
And indeed, some meaningful changes have transpired. Higher foreign direct investment (FDI) in insurance and passage of the coal bill have been notable legislative successes. On executive actions, fuel subsidy rationalization and a restrained increase in agriculture support prices are already having an impact. FDI inflows have risen quickly, inflation has remained contained and space has been created for higher government capex.
But gradualism can have limitations, potentially leading to inaction and leaving the spectrum of ‘bolder’ reforms untouched. Important reforms remain wanting. The land bill and the goods and services tax (GST) legislation have both gotten stuck. And problems persist outside Parliament. Many complain that ease of doing business, the bedrock of the ‘Make in India’ campaign, is improving way too slowly.
To complicate things further, reforms are becoming increasingly non-binary. It is not just about getting the GST bill passed. It is more about getting a high-quality GST. Estimates suggest that an ideal GST could add 150-200 basis points to economic growth. But in its current diluted form, that potential, on our calculations, has halved to about 60 basis points. Put differently, the low hanging fruits—binary reforms like increasing FDI limits—have been picked. Increasingly, detail is going to matter.
Cynics fear that meaningful reforms generally happen early on in the government’s five-year tenure—and hence the window has already closed. But our analysis of legislative efficiency during previous regimes suggests there is no fixed opportune time. Using the metric of productive time during Parliament sessions, we find that the NDA government (1999-2004) had two peaks—it got much done early on and then also pushed through some legislative action towards the end of its tenure. The UPA-1 government (2004-09), on the other hand, managed to slip in more in its last year; while the UPA-2 (2009-14) peaked out in the first year (see chart).
We hope that the current government mirrors the UPA-1 experience; i.e. it grows into the role and delivers more as it gathers experience.
So far, success has been ‘half empty, half full’. Profiling reforms into four bins, we find that, first, more action has been on ‘project implementation’ than on system-wide policy changes. Specific projects like the Delhi Mumbai Industrial Corridor continue to progress, but a new genre of public-private partnership agreements, which can benefit many more infrastructure projects across sectors, has not been finalized.
Second, there has been substantial executive action, but legislative success remains wanting. True, in some instances, lack of legislative action is not a deal breaker; for instance, even before formalizing the inflation targeting framework into the RBI Act, the central bank is already functioning as an inflation targeter.
But for tackling issues that have shackled labour and land markets, legislative action is vital. Already, the government has suffered some setback in the land and GST bills. Over the next few months, labour codes and the bankruptcy code could also face impediments.
Third, the government has made important strides in bringing India’s states on board to support its reform agenda (vertical cooperation). Higher untied tax funds to Indian states as per the 14th Finance Commission marked the start of a collaborative relationship. Since then, the centre has incentivized states to legislate on matters such as labour and land, compensating somewhat for its own lack of success in these areas.
However, on a horizontal plane, productive coordination with other political parties has been insufficient, culminating in delays in key legislative action.
And finally, while gradual steps across important issues have been taken, “big-bang” reforms have not materialized. The government’s subsidy rationalization first covered liquefied petroleum gas and has since progressed to kerosene. A bolder approach would have entailed a faster move across all product classes, especially the more contentious food and fertilizer subsidies.
Why not think instead of “small bang” reforms? These could start off gradually, but have a clearly defined roadmap with milestones for the medium term. For instance, a “small bang” for subsidy reform would have rationalized fuel subsidies immediately and have a one/two-year deadline for food and fertilizer subsidy reforms. Similarly, dilutions in the GST bill can be overcome by setting clear dates by when distortions will be removed. The move to professionalize management of public sector banks through the banking bureau can be accompanied by a clear roadmap for reducing government ownership.
Indeed, while “big bang” may be difficult in India’s multi-layered governance structure, a series of “small bangs” can compensate. Because even the camel, on that cold night, would have taken some bold liberties in its way into the tent.
Pranjul Bhandari is chief India economist, HSBC.
