India: Short Term Economic Reform Fears

2004

Raghbendra Jha

In an earlier article (January 2004) I had opined that economic growth prospects for India would depend upon the adoption of reforms that would make labour markets more flexible. Inflexibility in labour markets coupled with reservations of market shares for small scale industries in crucial segments of the manufacturing sector have prevented India from realizing its comparative advantage in low-value added manufacturing such as textiles, footwear and the like. With plentiful labour; sufficient capital; opening market opportunities such as China; and after several years of high economic growth and moves up the value chain of production, the only factor holding India back from significant expansion is outdated labour and product market regulations. The outgoing government was committed to reforming these regulations. However, the parliamentary elections of April-May 2004 have thrown up a fractured verdict.

The Congress and its pre-poll allies need the support of parties (including the Communist parties), whom they bitterly criticized during the election campaign, to form the next government. Naturally there are likely to be deep disagreements on economic policy issues within the new ruling coalition. Without the Communist parties the ruling coalition will be in a minority. The Communists are unwilling to join the government but, in exchange for their outside support of the government, have already demanded at least a go-slow on the nascent privatization program and are opposed to labour market reforms. After days of deliberation a common minimum program for the ruling coalition is still elusive. Although the ruling coalition has 322 MPs in a house of 543, it is fragile and subject to threats from supporting parties both within and outside the government.

This makes the task of continuing economic reforms onerous. Apart from the difficulties of accommodating the Communists views, fast implementation of economic reforms is also likely to be opposed by some constituents of the ruling coalition, who are facing state level elections in the next two years or so. There is at least one large party within this group whose exit might also threaten the stability of the government. These coalition parties are likely to oppose widespread reforms that might hurt their constituencies in the short run. Thus, the pace of the economic reforms program is likely to slow down.

WATCHPOINT: How the conflicts within the ruling coalition are likely to sort themselves out will be partially revealed in the first budget of the new government to be unveiled in July 2004.

 

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