BackThe changing story of economic reforms
Reversals in economic policy are more frequent at the level of the states
Premium
Ever since Narendra Modi launched his campaign for the top job in India, companies, investors and citizens have been expecting economic reforms with excitement not seen in the country for many years. Sane analysts have held a more cautious view of what is possible and what is not, pointing to the fact that reforms in India are not possible without chief ministers shepherding them through difficult political waters of Indian states. Unlike the national level, where party politics roughly corresponds to economic positions, such correlations are weak and reversals in economic policy outlook, more frequent.
One such story of changing preferences is that of two chief ministers, N. Chandrababu Naidu of Andhra Pradesh and Vasundhara Raje of Rajasthan.
Naidu, who was once the poster boy of reformers in India, is today a changed man. He has announced a loan waivers to farmers and women organisations estimated at around 70,000 crore. Gone is the man who raised electricity tariffs and launched an ambitious economic restructuring plan (with help from the World Bank) in his first term as chief minister from 1995-2004. In contrast, Raje, in her pervious term as chief minister, was indifferent to reforms and even mildly populist in her approach. Today, she is a changed person. Rajasthan is taking steps in carrying out labour reforms first and the Union government seems to take its cues from the state government.
Has Naidu lost his taste for reforms and has Raje acquired a new likeness for them?
The story is not of changing personal preferences but one of the environment in which reforms are carried out. Naidu’s first term as chief minister and his reformist phases coincided with a series of confused governments in New Delhi. This was the time when prime ministers were more keen in ensuring their survival. Economic reforms were not their priority. To be sure, in his later years a reform-minded government under Atal Bihari Vajpayee was at the helm on Delhi. But the initial resistance to state level reforms by a broad coalition of state government employees (especially those connected to the power sector) and farmers ensured that Naidu would spend a decade out of power. Chastened, today he is as populist as any chief minister can be. It is hard to believe that when he should be concerned about putting his new state on a sound economic footing, he is more attentive to loan waivers for farmers. This is understandable as it was the same farmers who booted him out of power in 2004.
Raje, in contrast, senses an opportunity. In New Delhi, a prime minister who holds a favourable opinion on a larger role for the private sector is making all the right moves. Rajasthan has much to gain if investment flows begin in response to its relaxing of labour laws. As a state that continues to be a laggard in the quartet of India’s economically sick states—appropriately acronymed BIMARU—Rajasthan needs a heavy dose of investment if it is to grow at a faster rate. For too long has the state been subjected to socialist experiments. Raje realizes what needs to change.
The story is simple: reforms cannot work in isolation in just one or two states without coordination between the Union government and the states. If they are to take off and the benefits of growth translate into gain for citizens then active cooperation between the states and the Union government is essential. The former have to take the initiative and the latter provide an enabling environment.
If Naidu lost out in 2004 it was because the Union and the state governments were out of step. Raje in 2014 finds herself in a different environment.
Economic reforms in India take place in two different environments. One, during a crisis—the exemplar being the balance of payments crisis in 1991 that was used to prise open product markets and liberalize India’s external sector. Two, when they are driven by a reformist Union government, for example during the Vajpayee years 1998-2004.
Both were special circumstances and they don’t exist today. Reforms driven by the Union government unmindful of local political conditions are unlikely to be acceptable to chief ministers who live in a far more volatile political world. Naidu’s experience should be an illustration of these limitations.
Even the most well-intentioned reforms will produce a set of winners and losers among citizens. Ideally, this should not be the government’s concern. But unless those who lose out from reforms are helped, they will create hurdles for their implantation in other states and at different times.
Should the losers from economic reforms be assisted? Tell us at views@livemint.com
Follow Mint Opinion on Twitter at https://twitter.com/Mint_Opinion
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
