India Wows with Its Latest Economic Steps

September 14, 2012 2:30 PM

Within the space of two days, the Indian government, spearheaded it appears by the Finance Minister, P. Chidambaram, has taken a series of policy steps to get India out of the funk it had been sliding into.

First, it enacted measures to reduce fuel subsidies on diesel and limit the subsidy on cooking gas.

Second, it has approved greater foreign direct investment (FDI) not just in multibrand retail (which would benefit Walmart in particular) but in aviation (which might be necessary to rescue one of the major airlines that is essentially bankrupt—Kingfisher) and broadcasting and power exchanges.

Third, it has approved privatization of four government companies, which is estimated to yield about $3 billion in additional revenues.

The fiscal impact of the reduction in fuel subsidies and privatization will not be huge—less than 0.5 percent of GDP. But the symbolism of a government that is shaking off the political paralysis and undertaking bold reforms should not be underestimated. A measure of the boldness of these actions is that they are vulnerable to reversal because the opposition has gone on war footing to challenge, in particular, the fuel subsidy action.

Foreign and domestic investors will and should be impressed. And if reviving investment is as much about reviving confidence and animal spirits as about substantive action, these latest moves can only help the economy.

Politically these actions suggest that the Finance Minister has come out of the recent cabinet reshuffle strengthened and that he has established a strong relationship with Sonia Gandhi, president of the governing Congress Party, and India’s de facto political leader.  

Once again, the near-iron rule of political reforms, namely that they are most likely to occur in the face of a crisis, has been borne out. India is no different than the euro area in that respect.