INDIA: Reform to continue as Singh takes the helm

Analysis

Congress Party President Sonia Gandhi's last-minute decision to decline the office of prime minister has caused chaos within her party. Indeed, constitutionally the Congress Party may not presently exist, since virtually all members of its top committees have resigned in sympathy with and/or in protest against her decision. Nonetheless, her decision has strengthened the position of the multi-party Democratic Progressive Alliance (DPA), which she led to victory at the general election (see INDIA: Rural vote propels Congress to power - May 17, 2004), and Congress committee members will soon resume their seats.

Opposition outflanked. Gandhi's decision has outmanoeuvred a significant section of the opposition to the DPA, led by the outgoing Bharatiya Janata Party (BJP), which had planned to launch a major campaign on the issue of her non-Indian birth. Rather, she has exposed the implicit racism behind Hindu nationalism and left the BJP confused and embarrassed. Moreover, her resignation has seen several Congress allies rally more strongly to the DPA's cause. For example, the DMK of Tamil Nadu has now agreed to serve inside the new cabinet and not merely support it from the floor of the House.

Singh's prospects. Fears that Gandhi's decision to remain president of the Congress, despite declining official government office, will undermine Prime Minister Manmohan Singh may also be exaggerated. While lacking political experience, Gandhi has shown intense loyalty to her closest and oldest friends, who include Singh. She is thus highly likely to remain his staunch ally.

Nonetheless, Singh faces a difficult task in forming a new government and providing it with a coherent set of policies. He enjoys universal respect as an economist and statesman, and as someone untainted by corruption. However, he also has limited political experience and must form a government from the highly disparate parts of the DPA, within which the Congress itself holds only 143 of 219 seats. It will be hard work to retain the backing of the outside parties whose support is needed to gain a working majority (of 272 members) in the 543-seat Lok Sabha.

Distribution disturbances? Problems could arise immediately over the distribution of ministerial portfolios, for which there will be fierce competition. The composition of the DPA could change in the next few days, particularly if efforts are made to accommodate the Samajwadi Party, which has 38 seats and could cause disturbance if left on the back benches. There is still a limited risk that Singh's efforts to form a government will fail.

The final composition of the DPA will also determine the extent to which Singh will depend on support outside of the government from the communist parties, especially the Communist Party of India-Marxist (CPM), which currently guarantees his majority. The CPM, which has 42 seats, is proving one of Singh's staunchest allies as it seeks to sustain a common front against the BJP and the threat of Hindu nationalism.

Policy outlook. In the interests of securing cooperation with the Left, Singh is drawing up a Common Minimum Programme to outline the general direction of his policy. On the economy, he will signal the continuation of economic reform:

• As finance minister in the Congress government of 1991-96, Singh inaugurated the reform programme, which has continued -- albeit hesitatingly -- ever since.
• India's capital markets have faith in his 'liberalising' credentials. Following the worst crash in the Mumbai stock exchange's history at the start of the week, markets had virtually recovered following the announcement, two days later, that he would become prime minister.

Many parties of 'the Left', including the CPM, will not object to the broad principles of liberal reform, upon which there is broad consensus among all but the most extreme of them. Indeed, in the two states where it is most deeply embedded in government (Kerala and West Bengal), the CPM has itself adopted liberalising strategies.

Emphasis shift. While reforms will continue (not least because there appears to be no alternative), the targets and methods of implementation may shift. Attempts to attract foreign direct investment (FDI) and technological expertise into key areas of the economy, and also to promote India as a centre of business process outsourcing (BPO), should continue. However, in opposition, Singh condemned some of the initiatives pursued by the last government -- particularly, selling off successful public-sector undertakings (PSUs) in the energy sector. His policies in the early 1990s envisaged privatisation only for unsuccessful PSUs, and also the abolition of public-sector monopolies in favour of market competition in which PSUs themselves could still participate. Reform policy is likely to swing back in this direction.

The government will pay more attention to two key issues:

1. Rural development. Cuts in public investment have fallen heavily on the countryside in recent years, where there are few opportunities for private investment to take up the slack. The decline in rural investment may have made the economy even more vulnerable to the effects of poor monsoons (which caused the economic slowdowns of 1999-2003), and it is not only parties of the Left who advocate the need for change.
2. Employment creation. One million industrial jobs have been lost in the last decade, and the age-profile is producing a rapidly expanding labour force. In focusing increased attention on these areas, Singh and the Left are likely to pursue policies designed to encourage the public and private sectors to develop a complementary relationship.

Labour laws. The CPM (which retains a strong constituency among India's residual working class) will seek to protect restrictive labour laws, especially in the public sector. However, these laws are of little broad significance. They have long been circumvented in practice in most areas of the economy, and they only cover 3% of India's total workforce.

Fiscal policy. The CPM's inevitable demand for increased subsidies and taxation could run counter to Singh's obvious desires to facilitate entrepreneurship and reduce fiscal deficits. However, there may again be room for compromise: in the past, Singh has consistently attacked inefficiency in systems of public distribution (for example, only 26% of the cheap food intended for the poor actually reaches its target).

In addition, India's current system of taxation contains many loopholes, which defy rational justification and which allow large corporations to enjoy lavish investment allowances without investing. Singh will probably try to meet demands for increased wealth re-distribution by tightening up the existing systems of taxation and subsidy rather than by pursuing wholesale cuts or systemic changes.

There is a risk that, if such measures fail to yield results, problems of rising fiscal deficits could increase over time. However, such problems are endemic to India's political economy, including under the BJP-led government. In this, as in many other areas, the new DPA government is likely to show more continuity than change with its predecessor.