What Next for India?

On Tuesday Manmohan Singh’s government survived a vote of confidence in India’s parliament, triggered by the withdrawal of the support of the communists over the Prime Minister’s pushing the nuclear deal with the US. This is a tremendously positive development for India. The communists, who have been resolutely obstructionist and backward-looking, have lost their clout for now, and the Hindu extremists are also at bay till elections next year. Meanwhile, oil has fallen by over $20 a barrel. No wonder the Indian stock market indexes have risen so dramatically. The rupee has also appreciated a bit against the dollar, and I would argue that the Reserve Bank of India should stop further monetary tightening. Of course I have been saying this for a while, even as inflation rose and the RBI kept raising interest rates and the reserve ratio. But I really think that those measures will only bite several months down the road — too late for squeezing current inflation. I do understand there is an argument about inflation expectations, but I haven’t seen those modeled, so it seems to me to be a precarious basis for what has been fairly significant monetary tightening already. The changed political balance and the economic breathing room really provide a golden opportunity for further reform. Financial sector reform includes some low hanging fruits. Removing needless controls on futures markets, in fact, building up more such markets, and improving their liquidity and transparency, would be great. I think there are enough people in India who have the expertise to make these things happen without serious missteps — they just happen to be in the private sector. If the market dictates further exchange rate appreciation, I’d let it happen, rather than trying to protect exporters — much better to give them tools for proper hedging. There is so much scope to improve productivity in the Indian economy that it seems that the government has no excuse now to go wrong. One area that again and again strikes me as ripe for efficiency improvement through foreign and domestic entry is higher education. It would be great if the Prime Minister can now control the obstructionists in his own party, and liberalize higher education. The great thing about many of the policy options open to the government is that they cost no money, and will likely increase tax revenue, so they can improve the deteriorating fiscal position. The next six months may be a window for the Prime Minister to achieve greatness as a leader. Let’s see what happens.