Why Modi goes for small-bang reforms

For Indian Prime Minister Narendra Modi, Deepavali came early this year when his Bharatiya Janata Party (BJP) won crucial elections in the states of Maharashtra and Haryana. He has celebrated with a bang — a little one.

On Oct 18, a day before the election results were announced, Mr Modi’s government deregulated retail diesel prices. On Oct 20, the administration issued an ordinance intended to sort out the mess in India’s coal industry, which had been thrown into turmoil by recent decisions by the Supreme Court. Many supporters expected bigger things from Mr Modi by now, five months after his inauguration — perhaps a lifting of all fuel and fertiliser subsidies or the privatisation of state-owned Coal India. But Mr Modi’s more modest reforms may be a smarter way for India to move forward.

Expectations that the forceful Mr Modi would suddenly rip up decades of bad policy after taking power were always overblown. The Prime Minister seems intent instead on working through gradual, calibrated changes to India’s decaying policy framework. Take the ordinance on coal. A Supreme Court ruling invalidating the allocation of more than 200 coal blocks handed out since 1993 left dozens of private companies in doubt about their power supplies. The government will now reassign those blocks using a transparent, online auction rather than a murky and easily corrupted bidding process.

The power, steel and cement companies that depend on these coal supplies now have a degree of clarity. Coal-rich states will benefit, as their governments will get the revenue from the auctions rather than New Delhi.

The ordinance falls far short of denationalising the coal sector, which is ultimately the only way to solve India’s perennial power shortages. But any such move would inevitably have failed, given that Mr Modi’s party still lacks a majority in the Upper House of Parliament. Worse, a futile attempt would probably have derailed even smaller-bore reforms of the sector. The new ordinance contains an enabling clause that recognises the need to open up coal mining to private competition. If BJP continues to gain seats in coming state elections, Mr Modi could be in a position to invoke that clause before the end of his first term.

The Prime Minister does not need Upper House approval to lift fuel, food and fertiliser subsidies, which together account for a third of India’s huge fiscal deficit. The regulation of diesel prices was a particular scandal, benefiting mostly rich sport utility vehicle drivers and truck transportation companies. Ending it — especially while global oil prices are depressed — was a no-brainer.

To go further, however, would also have provoked crippling resistance. Raising the prices of cooking gas and kerosene — both of which are overwhelmingly used by the hundreds of millions of India’s poor — without setting up a buffer of some sort would have been irresponsible and rightly opposed. Mr Modi said he planned to rationalise those subsidies by replacing them with cash transfers to the poorest citizens; the same would apply to food and fertiliser subsidies. First making sure that the transfer system is workable and uncorrupted makes good political as well as policy sense.

This style of incremental reform may be too slow to propel India back to double-digit growth, as some fear. But the overhang of bad policies in the country is too acute to be solved in a matter of months. Unlike his predecessors, Mr Modi is, at least, not creating any bad policies. In India, that counts as progress. BLOOMBERG

ABOUT THE AUTHOR:

Dhiraj Nayyar is a Bloomberg View columnist and former CEO of Think India Foundation, a public policy think-tank.