Reforms and Politics in India

The Economist writes:

What India needs now is a raft of supply-side reforms that will, in the short term at least, hurt powerful interests. These are principally the trade unions which, through their control of the Communist parties that in turn prop up Mr Singh’s minority government, are able to hold him to ransom. As we report (see article), the Communists have more or less brought Mr Singh’s reforms to a halt. He has been unable to continue the task of privatising the plethora of inefficient state-owned businesses. He has found it almost impossible to ease the system of caps that limit foreign direct investment in many big sectors, notably retailing. And labour market reform is not even being discussed.

The gloom should not be overstated: India today has a dynamism that has never been there before: witness the incredible growth of outsourcing companies, now doing legal and medical work for clients around the world, not just running their call-centres. The momentum from the earlier reforms continues, and despite his difficulties Mr Singh has been able to introduce a national rate of value-added tax, and pioneering public-private partnerships for road building. It probably is the case that the earlier reforms focused too much on the affluent city-dwellers at the expense of the rural poorwho voted the BJP out of office last yearso a period of consolidation may be no bad thing. Sooner or later, though, India will have to tackle its remaining rigidities.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.