Reforms: Left out of the way, can govt deliver?

The enormous build-up and eventual resolution of the trust vote last week may have had entertainment value to rival the best cricket match or the latest blockbuster movie, but, unfortunately, unlike in the entertainment domain, there is no 'happily ever after' in government.

The challenges that were staring the country in the face when the stand-off over the nuclear deal swept everything else off the table remain. Having received the confidence of the Lok Sabha, those challenges must obviously now take priority.

Accounts of how the vote was managed by the Congress and its coalition partners present a picture of great purpose and co-ordination. Post-vote announcements by the government also suggest its intent to re-activate the reforms agenda, which has been in virtual cold storage these past four years.

The speed with which the process to take the nuclear deal forward with the IAEA and the Nuclear Suppliers Group is reassuring and one would hope that the same sense of focus and urgency is brought to bear on some of the more pressing issues that the government must come to grips with.

From a political perspective, this will not be easy going. The exit of the Left parties from the coalition clearly opens up opportunities for the newly configured UPA government to move on several fronts that it couldn't before.

However, even in the most conducive of circumstances, a fifth-year government is hardly likely to be a dynamo for reforms, particularly those whose benefits will visibly accrue only after a significant lag. And, these are not the most conducive of circumstances.

The Congress Party came together determined to win the trust vote. This shows that it is united as far as the nuclear deal is concerned but doesn't reveal anything about its cohesiveness or lack of it on any other issues, particularly those which would have a significant bearing on upcoming elections.

Add to this the various arrangements that the UPA has presumably had to make with old and new allies and the next few months are more likely to see the government's energies being expended in seeing these through rather than on a concerted series of strategic reforms.

While there are a number of issues that clamour for the government's attention, let me focus on two, which I think are critical. Both will test the government's often-stated grievance that its dependence on the Left was truly a binding constraint on what would otherwise have been a genuinely reformist coalition.

More so, they will also test the government's capacity to leverage its success in the trust vote to achieve objectives beyond mere survival.

1. The first issue is that of domestic fuel prices. After many months of dithering on this issue, the government was finally pushed into a partial accommodation of the global situation by the fact that domestic oil companies were on the verge of bankruptcy.

As significant as the price increase was, the gap that remains is still very large and remains so even as international oil prices have begun to fall. The Left was very visibly and vocally against the increase.

The reluctance to pass on high international prices to domestic consumers has caused serious damage to a fiscal situation that, until this

crisis precipitated, was moving along very nicely towards the targets of the Fiscal Responsibility and Budget Management Act.

But, is there an appetite for doing the right thing from the economic policy perspective in the Congress Party and other UPA constituents? Raising fuel prices now will almost certainly be perceived as doing damage to the coalition's electoral prospects, already taking a beating from high inflation and other factors.

Of course, if price increases are not acceptable, there is at least an option available to help the government stem the fiscal bleeding -- disinvestment. This was another item on which the ruling coalition simply could not achieve consensus.

Whatever the other motivations for privatising public enterprises, given the level of fiscal comfort the economy had achieved until last year, there was no pressure at all to move ahead on this front. Both the economic compulsions and the political constraints have changed significantly and there is now a real opportunity to test the government's commitment to this item on the reform agenda.

2. The second issue that is on the critical list is power. The last-minute selling of the nuclear deal emphasised the harm that power shortages were inflicting on the economy and the importance of the nuclear option in alleviating the pressure.

That is fair to say, but the realisation of the benefits does depend on domestic power sector reforms going through. Despite the passage of the Electricity Act in 2003, its critical components like nation-wide open access and the transition from cross-subsidies between different categories of users to direct subsidies by state governments are yet to be implemented.

Some years ago, the requirement that cross-subsidies be eliminated was diluted to allowing state governments to continue with them to some degree. This was apparently on the insistence of the Left. Has the changed situation now created an opportunity to deal with this issue squarely?

On the issue of open access, unless state governments co-operate in allowing power generated outside the state to be carried on their state grids at prices that are transparently set by regulators, a national market will simply not emerge and much-needed investment in generation capacity will be stymied.

It would be ironic, even tragic, if the UPA government, having won the trust vote on the premise that the nuclear deal was indeed in the national interest, is unable to follow through on power sector reforms that will contribute to solving the problem in a much shorter timeframe.

Nobody can deny the UPA its right to focus on the objective of getting re-elected. However, that does not provide it with an excuse for not putting the reforms agenda, with which Messrs Singh, Chidambaram and Ahluwalia are so closely identified, back firmly on track.

This government deserves enormous credit for putting its survival on the line for a long-term issue that it believed was in the national interest.

One should expect no less a level of commitment to several other policy measures that were promised in 2004 but never delivered. As the events of last week demonstrated, it surely has the political skills to balance sound policy with electoral prospects.

The writer is Chief Economist, Standard & Poor's Asia-Pacific. The views are personal.