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Why reforms are not enough?
Mon, 24 Sep Pre-Open

Under immense pressure from credit rating agencies, corporate media and international and domestic business houses, India's government has announced a series of big bang economic reforms. These reforms are aimed at reducing the budget deficit at the expense of working people, attract foreign investment, and spur the reorganization of key economic sectors so as to make them more profitable for capital.

Opening up of sectors to FDI should lead to increased capital inflows, create new capacities and jobs in the future. All of this should augur well for the economy over the medium-term. In the short-term, however, it is not clear whether the measures will make a mend in the single biggest problem facing India today: its fiscal deficit.

Consider that the diesel price hike was only a one-off measure, and that diesel subsidies continue to be uncapped and at the mercy of global oil prices, accounting for more than half of the USD $30.8 bn oil subsidy bill. In contrast, the cooking gas subsidy, which was capped, is estimated to contribute just one-sixth of the total oil subsidy bill.

The risk of substantial fiscal slippage will continue unless the government takes more concrete steps, such as further cutting diesel and fertilizer subsidies, cutting planned expenditure and increasing the stake sale target. The government should also resolve the coal issue, introduce transparent and clear policies on land acquisition, mining rights and other environmental issues, and bring in accountability of the government and public sector.

It had been so long since Delhi had announced any major reforms at all - let alone a series in such quick succession. But there remains' the lingering fear that some of the measures could be rolled back under political pressure. This time, however, Manmohan Singh and the Congress Party have indicated that they are determined to face down any opposition within the UPA. It is also important to consider that some of the reforms are basic first steps and, critically, must be followed up by sustained action for them to be effective.

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