After a week of high political drama in New Delhi, the prime minister of India, Manmohan Singh, spoke to the nation on Friday evening, making the case for economic reform that had, until then, languished during his tenure. The speech capped a week in which the government announced a series of long-delayed measures, most notably raising the price of diesel and opening up foreign direct investment for retailers who sell multiple brands and in aviation and broadcasting.
In his speech, Mr. Singh made a credible economic case for the measures. Raising diesel prices was necessary to stanch the burgeoning fiscal deficit and prevent the Indian economy from experiencing the sorts of woes currently afflicting t he United States and Europe, he argued. Likewise, small retailers had nothing to fear from the impending arrival of giant Western retailers like Wal-Mart or Carrefour because there was a place for everyone, large or small, in a growing economy.
But he failed to address the political dynamics that this bold action, late in his tenure as prime minister, has unleashed. The measures might amount to good economics, but are they also good politics? Mr. Singh left that question unanswered.
Either way, Mr. Singh has thrown the dice. Some observers compare the boldness of the most recent initiatives with the resolve with which Mr. Singh signed a civilian nuclear pact with the United States in 2008, during his first tenure as prime minister and in the waning days of the administration of former President George W. Bush. That gamble paid off for Mr. Singh, paving the way for his party's re-election in 2009 and for his second term as prime minist er.
Can Mr. Singh take a leaf from his old playbook and convert a late gamble on economic measures into a winning hand in the next general elections?
What is clear is that the stakes could not be higher. If Mr. Singh is forced to reverse course again on the economic measures, or should his government fall before the end of its mandate in 2014, many could conclude that sound economic policy remains politically impossible in a large, populous and still relatively poor democracy like India.
An explanation for this situation may lie in the “median voter theorem,†which suggests that governments, regardless of ideology, tend to cater to the preferred policies of voters with the country's median income. In a nation in which one-third of the population lives below the poverty line, another third not far above it, and only the top third is considered middle class or prosperous, the median voter is likely to have relatively low income and to favor redistri bution over long-term growth.
That is why market-oriented economic policies in India, going back to the original liberalization of the economy in 1991, have been implemented by stealth or in crisis mode rather than by articulating to the electorate why they are required. It is a situation I have dubbed the “original sin†of 1991, and its effects linger to this day.
This “original sin†explains why, in his speech to the nation, Mr. Singh couched his defense of economic reforms in the language of “inclusive growth†and with repeated appeals to the “aam admi,† or common man. He did not address the fact that economic policies that confer long-term benefits may come with short-term costs, but that those costs may be worth it.
With the parsing of Mr. Singh's decisions and their likely consequences now solidly under way, it would be salutary to remind ourselves that the measures are, in fact, relatively modest.
Indeed, the recent announceme nts are comprised of administrative, or “stroke of the pen,†reforms that do not require legislative approval â€" leading at least one news report to dub them “overhauls†rather than true reforms. The ultimately more important reforms, like revamping India's antiquated labor laws or implementing regulatory reforms to curb corruption, simply are not under discussion because they would need to go through a Parliament that is so deeply-divided that it barely functions.
Keeping that bigger picture in mind may temper the zeal either for or against Mr. Singh's current gamble. He has thrown the dice, but is he playing at the high stakes table?
