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UPA’s elbow room to push crucial reforms may shrink
-The Indian Express

The Samajwadi Party’s sweep in India’s biggest state, Uttar Pradesh, and Congress’s defeat in Punjab and Goa will further shrink the elbow room the Congress-led UPA government at the Centre has to push through key initiatives such as foreign direct investment (FDI) in multi-brand retail, pension reforms and legislation such as the goods and service tax (GST) that require support from states.

The Centre had postponed some of these reforms preferring to wait for the outcome of state elections. In an interview to Bloomberg in December 2011, Prime Minister Manmohan Singh had said he would succeed in opening up multi-brand retail FDI after elections in February-March. “The verdict only suggests that the Centre will be more constrained than before and will do everything to keep its allies in good humour,” said a senior government functionary, who did not wish to be quoted.

The first indications of the government’s response to the poll debacle will be available in the Budget that Finance Minister Pranab Mukherjee is scheduled to present on March 16. “You cannot expect bold reform measures in the Budget. Anyway, Budget should not be about making loud noises on policies. It has to be about the outlook on government’s finances. Does it show fiscal discipline?” said a secretary-level government official with an economic ministry.

For 2011-12, the government has projected the fiscal deficit at 4.6 per cent of the gross domestic product (GDP). A slowing economy and half-hearted moves to push disinvestment has affected its revenues. On top of that, failure to hike diesel, petrol and LPG prices has resulted in mounting subsidies. Till January, the deficit in absolute numbers stood at 105 per cent of the target. While the government has curbed spending that may save Rs 40,000 crore (8-10 per cent in Plan expenditure), it may not help in checking the deficit below the 5 per cent of GDP mark.

The Budget for 2012-13 will be the government’s first post-poll statement on the economy. As a market expert said, the government has two options: play defensive i.e. take few or no risks and be liberal with sops or be offensive i.e. go ahead with bold measures that may be unpopular, but will rein in the fisc. “If the Budget does not present a credible fiscal consolidation programme, then it will be a bad signal,” said a market analyst.

In its investment research and analysis report released after the polls, Citigroup Global said, “If the Congress goes on the defensive, it raises the risks to the current rally as expected reforms may stall; the macro could strain, and capex may slow. In effect, economic revival gains that the market has started factoring in – could be challenged.” More sops – food security, universal healthcare and an expanded Right to Education Act – will mean further fiscal slippages.

If the government borrows more for all these entitlements, there will be little left for the private sector. Besides, it will leave no space for the RBI to cut interest rates. Foreign institutional investors (FIIs) who pumped in Rs 34,500 crore in January-February, will quickly find reasons to pause.

Some industrialists, however, have not lost hope. Sunil Munjal, joint managing director, Hero MotoCorp, said, “We expected the Samajwadi Party to form the government in UP with Congress help, and this would have emboldened the UPA on reforms. We still hope that SP will support the Congress in the Centre.” Political economists are not quite visualising such a scenario.

If, however, the Congress does reckon populist measures are not earning it electoral dividend, it may turn bold in the remaining two years before 2014 general elections. For the moment though, not many see Congress ready for such a strategy.