Did India Miss an Opportunity for Reform?

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Did India Miss an Opportunity for Reform?

The Modi government releases a solid budget that nonetheless avoids painful, yet necessary change.

Did India Miss an Opportunity for Reform?
Credit: REUTERS/Vijay Mathur

India’s much-anticipated 2015-16 budget was released on Saturday. This was the first full budget to be released under the Modi government and many analysts had called for – and expected – that it would include some major pro-market economic reforms. As it turned out, the budget did emphasize the government’s commitment to fiscal discipline and offered policies that may prove beneficial to the Indian economy in the future.

What the budget lacked, however, was any policy that will seriously threaten a vested interest or potentially ignite large-scale opposition. For example, there was nothing about privatizing India’s state-owned enterprises or reforming the country’s stringent labor laws. Of course, any major economic reform will have to do just this: upset vested interests. Only eight months into his term, and Modi’s best opportunity to introduce substantial economic reforms may have already passed.

The conventional wisdom among academics and market analysts is that politicians are more likely to initiate painful economic reforms early in their terms, when they’re most popular. Reforms generally have costs to society as a whole, or at least to powerful vested interests such as labor, and a politician needs to be popular to overcome this opposition. Moreover, pro-market reforms often make the economy worse before it gets better. Because of this, politicians introduce reforms early in their terms so that they are still in office when the benefits accrue, before the next election. Effectively, by initiating reforms early and when they are popular, politicians can wait out the tough times that ensue in the short term while reaping the benefits in the long term. If they aren’t popular then the opposition will defeat the reforms and maybe the politician as well. If they wait until late in their terms to initiate reforms then the next election may come before the benefits.

Delhi Elections

Modi was and is immensely popular in India. However, there can be little doubt that he was more popular immediately after his party crushed the opposition in last year’s election. That election was unique for a number of reasons. The BJP (Modi’s party) was the first to win an outright majority in the lower house in more than 20 years. The election was also unique among recent Indian elections in that it was fought between candidates as opposed to between parties. Modi was the face of the BJP across the country and his immense popularity is what led to the BJP’s victory. No single party approached the BJP’s performance. The Congress Party, the powerhouse of Indian political parties since independence, performed terribly and was left in complete disarray.

Since then, Modi’s popularity has gradually waned. Not tremendously. The BJP is still the only viable national party and Modi is still very popular. However, Modi and the BJP are clearly concerned that their popularity is on the decline. The BJP’s major setback in the Delhi elections in February was a blow to Modi’s image and the electoral mandate he received last year. Since then, Modi and his party have made a number of moves that indicate that they are very concerned that they are losing voters. Immediately after the recent Delhi elections, Modi made a speech about how India needed to embrace all religions and that extremism would not be tolerated. Some pundits had argued that voters in the Delhi elections were rejecting the BJP’s Hindu nationalist ideology. The next week the government made a display of Modi’s request to a village in Gujarat to take down a shrine to Modi in a local temple. Other pundits have argued that the BJP’s defeat was due to Modi’s fading image as a man of the people. Soon after, the government announced that the much mocked monogrammed $16,000 suit Modi wore while meeting Obama last month was given to charity. These moves suggest that Modi and the BJP are sensitive to the criticism and worried about an opposition that only a few months ago was effectively non-existent.

To some degree, Modi and the BJP appear to be correct about the remerging opposition. One of the only economic policies Modi has implemented while in office that could potentially give rise to large-scale opposition appears to be doing so, albeit slowly. In December 2014, Modi issued an executive order that made limited changes to the national land acquisition law. Although the changes were modest in scope, opposition has been growing in rural areas and a protest of 5,000 farmers arrived in Delhi this past week, just days before the budget was announced. Meanwhile, the Congress Party is attempting to use the issue to start its own revival, following its crushing defeat in last year’s national elections. Similarly, the AAP, the party that decimated the BJP in the Delhi elections, is attempting to use the land acquisition issue to establish itself as a pro-poor party nationwide. Even groups affiliated with the BJP are urging the party to back away from the order. And, again, this was not a major reform. More than opposition to a policy that boldly takes on vested interests, the backlash is being driven by an opposition that is slowly reorganizing after being crushed in last year’s election.

Lastly, the precipitous fall in the price of oil provided an opportunity for reform that no one could have predicted. A covered here, the fall in the price of oil improved India’s finances and current account. Modi’s government did use this opportunity to reduce subsidies on gasoline, although the actual price of gas did not change for the consumer as the decline in subsidies has been smaller than the decline in the price of oil. Effectively, the average consumer has yet to feel the reduction in subsidies. The drop in the price of oil has checked inflation while stimulating much of the improvement in GDP growth since the first quarter of last year. This unexpected windfall would seem to have been the ideal way to offset any potential short-term costs to the economy of structural reforms. Instead, the government has used cheaper oil to help meet budget expenditures in a way that will disappear the moment the price rebounds.

Modi was elected on a mandate of economic development. Many observers interpreted this to mean he would pursue pro-market economic reforms. Instead, Modi has been fortunate enough to benefit from the decline in the price of oil while avoiding potentially unpopular economic reforms. Given that he did not pursue reforms early in his term when he had a mandate for change and the price of oil is providing growth without inflation, it is unlikely he will do so in the future. Modi appears content to tweak the economy at the edges rather than risk his popularity on major structural reforms. Of course, with the notoriously anti-incumbent Indian electorate, this is a risky proposition in and of itself. Modi was elected with high expectations. Simply avoiding failure may not be enough to meet them.

Alan Potter is completing his PhD in Politics at New York University. His work focuses on the political economy of South Asia and specifically how governments enact potentially painful economic reforms.