Why is India Faltering on Economic Reforms?

A broad ambivalence about economic reform prevails in New Delhi

So what has brought about the reversal of fortune?  The conventional wisdom focuses on the dysfunctions of the present coalition government in New Delhi as well as the feckless leadership of Prime Minister Manmohan Singh.  The Trinamool Congress and Tamil Nadu’s Dravida Munnetra Kazhagam party have indeed proven to be most nettlesome partners in Mr. Singh’s cabinet.  TMC’s leader, Mamata Banerjee, the firebrand politician who serves as West Bengal’s chief minister, in particular has emerged as what one observer calls “a one-woman wrecking crew of the national government’s policy initiatives.”

A tribune of economic populism, Banerjee was instrumental late last year in forcing Singh’s ignominious retreat on opening up the huge retail sector to foreign companies, an act that would have had a transformative economic impact if it had been allowed to proceed.  Indeed, she even reportedly snubbed the prime minister by refusing to take his phone call on the matter.  Her stranglehold on his government was once again evident last month when Dinesh Trivedi, the railways minister, proposed a modest increase in passenger fares for the cash-strapped rail system.  Trivedi was hand-picked by Banerjee for his post but the move ran afoul of her policy views.  So she demanded that Singh unceremoniously replace Trivedi with Mukul Roy, who while serving as the junior railways minister less than a year earlier publicly defied Singh’s order to visit a rail accident site.  Invoking the “compulsions of coalition politics” – a refrain he has repeated frequently over the last year – he meekly complied with the demand.

The country’s economic travails and the ructions within his own government have put a huge dent in Singh’s once-stellar reputation.  Three summers ago, he was the first Indian prime minister in decades to win re-election, an unexpected political victory he hailed as a “massive mandate.”  The business community was so euphoric about the possibilities for new economic reforms that frenzied trading at the Bombay Stock Exchange tripped the electronic breakers.  The Australian newspaper hailed him “one of the greatest statesmen in Asian history” while The Independent described him as “one of the world’s most revered leaders.”  Forbes magazine wrote that he was “universally praised as India’s best prime minister since Nehru.”

But all the adulation is now distant echoes.  Last year The Financial Times upbraided Singh for “squandering the nation’s future through a lack of political will” and its South Asia correspondent opined that “India has quickly come to regret Manmohan Singh’s second term as prime minister.”  The Mint newspaper charged that his “inability to steer the government and tame the more reckless of his colleagues is now undeniable.”  More recently, the international ratings agency Moody’s, which currently assigns its lowest-investment grade ratings to long-term Indian sovereign debt, asserted that the prime minister, who turns 80 in September, is no longer up to the demands of his office.  An “ageing technocrat who now appears tired of the rough and tumble of Indian politics” is how he was described.

But the fundamental problems about his government’s economic stewardship do not stem principally from Singh’s personal leadership traits.  His actions in the tumultuous parliamentary vote on the U.S.-India nuclear accord – that nearly brought down his government in the summer of 2008 but which ultimately was his finest hour in office – clearly attest to his grit and tenacity.   Some allege that Singh does not deserve his widespread reputation as a veteran reformer.  But this perspective does not accord with his primary role in launching the economic reform era two decades ago as finance minister to Prime Minister P.V. Narasimha Rao, nor with the desire to move forward (albeit in a thoroughly botched way) with retail-sector liberalization.  Similarly, it does not explain such recent low-key reforms as the creation of special industrial zones where Nehruvian-era labor regulations are relaxed or the roll-backing of restrictions governing foreign participation in the Indian equity market.

A stronger explanation lies in the institutional constraints under which Singh labors.  He has the hapless distinction of being a prime minister who is in command of neither his cabinet nor his own party.  While he serves as the government’s front man, the real power resides in the Nehru-Gandhi dynasty that controls the governing Congress Party.  Sonia Gandhi, the party’s risk-adverse head, does not share Singh’s reformist inclinations and is more given to market-distorting welfare spending than productivity-enhancing measures.  This awkward division of labor between Prime Minister Singh and Mrs. Gandhi has been a recipe for policy inertia and inconstancy.  In the view of one Western diplomat, “Even the power structures in North Korea are clearer than those in India.”

It also does not help that Singh is not a natural politician and lacks an independent power base that would enable him to crack the whip against recalcitrant colleagues in the cabinet or the Congress Party.  He is not even a member of the Lok Sabha, the directly-elected lower house of Parliament, but rather a member of the Rajya Sabha, the indirectly-elected upper house.

So is evicting the Congress Party from the prime minister’s office the solution to India’s economic problems?  Sadly no.  Because economic reforms were born amidst acute crisis two decades ago, there is no intellectual tradition underpinning them nor has a political champion emerged to galvanize public opinion for them.  Both Gurcharan Das, business leader turned public intellectual, and Nandan Nilekani, one of the famed co-founders of Infosys, have observed (here and here, respectively) that reforms have been pushed more by technocrats like Mr. Singh than by political leaders, a condition that ensures narrow and limited support.  The word “reform,” Nilekani notes, remains “conspicuously absent from the election manifestos of India’s parties.”

This broad ambivalence accounts for the glaring silence in New Delhi last summer at the 20^th anniversary of the 1991 reforms – even the prime minister remained mute – as well as the air-brushing of Narasimha Rao out of the Congress Party’s institutional memory.  Ironically, the success of the economic transformations Singh set in motion back then have only reinforced the present status-quo orientation of his party colleagues.  But even the main opposition in New Delhi, the Bharatiya Janata Party, is similarly hesitant.

Kaushik Basu, the chief economic advisor at the Indian finance ministry stirred up controversy the other week when he stated the policy paralysis in the current government meant that crucial economic reforms would have to wait until after parliamentary elections that need to take place by mid-2014.    But given New Delhi’s general irresoluteness on the issue, that estimate may well be overly optimistic.

This commentary was originally posted on Chanakya’s Notebook.  I invite you to follow me on Twitter.