Why Modi needs to treat 2014 like 1991: Govt will not get an extended honeymoon

Narendra Modi should treat the economic challenges of 2014 in the same way as Narasimha Rao did in 1991. Despite differences between the situation in 1991 and now, if he does not move fast, Modi could find himself losing political momentum. Honeymoon periods for victorious parties tend to be short, and this is what Modi needs to take into account while planning his next economic moves.

In 1991, the Iraq war sent oil prices spiralling and forced India to confront the real issues of a failing, unreformed economy, thanks to looming external bankruptcy. To add to our woes, economic mismanagement by Rajiv Gandhi in 1987-1989, followed by two more years of political instability under VP Singh in 1989-91, ensured that no remedial action was taken for four years.

That crisis forced even a non-economist like Narasimha Rao to think radical reforms, and the hour produced the right man for the job: a bureaucrat called Manmohan Singh. The rest is recent history.

In 2014, another Iraq crisis looks set to firm up oil prices. On Friday (13 June), Brent crude oil zoomed to $113.41 a barrel, up nearly $7 from average prices a fortnight ago, as indicated by the Petroleum Planning and Analysis Cell, which looks at our mix of crude oil imports. The happy assumption that the diesel subsidy, currently at Rs 2.80 a litre, will come down on its own as crude prices fall could turn out to be false. Fuel price deregulation has to be speeded up, before another subsidy crisis builds up.

But the similarity with 1991 - oil spike concerns - ends roughly here. The recent elections have brought political stability, and the previous government, despite serious economic mismanagement during 2010-2013, at least began some efforts to address the problems. There is also no major external crisis looming, and foreign exchange reserves are comfortable at $312 billion ($285 in foreign currency assets alone).

The essential difference between 1991 and 2014 is the political situation: in 1991 a new government inherited an economic crisis, and the need for action was obvious to everyone, including the government’s critics. This moderated opposition to reforms, despite regular carping by the Left. In 2014, despite high inflation and an economic slowdown, the sense of crisis is less palpable.

Bankruptcy concentrates minds. A lack of a sense of crisis - as now-is problematic.

This is why 2014 is more dangerous than 1991. Our government may think some tinkering here and there will restore growth, especially when the stock market has recovered visibly even without any effort. The opposition, badly mauled by Narendra Modi in the last election, is sullen and smarting at the ignominy of it all. It is waiting to strike back at the first opportunity. Reform could provide it with one stick to beat the government with.

So, despite a parliamentary majority, and despite soothing noises of reconciliation from Modi himself, the political climate will be worse in a few months’ time than it was in 1991. The reason is simple: weakness brings forth more bile than strength. And the opposition is nothing if not weak right now.

The government has to act when it is still politically strong. This is once again a time for radical reform, and radical reform calls for changing many laws that hold back development and growth, including the Land Acquisition Bill that is probably the UPA’s worst legacy. And I am not the only one saying it (read here ). Political consensus can be manufactured when the elections are still fresh in memory, but not months later, when other elections come into view.

Three factors are complicating the economic revival issue for Modi.

First, the UPA-2 has dangerously booby-trapped the economy by legislating all kinds of costly social programmes that will make easy recovery impossible.

Second, the NDA has run smack into a possible El Nino monsoon issue. There is the possibility of a drought in some states, and a sharp fall in agricultural production cannot be ruled out in 2014-15. A lot of the government’s resources will thus have to be earmarked to alleviating the fallout from this agrarian crisis.

Third, both inflation and growth will remain problems this year too , and acche din may take time to come visit us.

On the plus side, it is heartening to note that Modi has easily slipped into governance mode and there is a visible shift of emphasis from irresponsibility under UPA-2 to responsibility and accountability among both ministers and bureaucrats.

But here’s the catch: the Modi government cannot assume it has five years in which to deliver the goods. It is worth recalling that political capital gets spent pretty quickly in the Indian context. After a thumping victory in 1971, by 1974 Indira Gandhi’s government faced huge popular protests on inflation and corruption. Her son, after an even greater win in 1984, was in deep political trouble three years later.

The political reality is simple: the public honeymoon period for new governments tends to be short in India, and if a government, with contentious reforms in mind, does not get its act together quickly, it will lose the initiative as other political challenges come up.

As I had written last December , new governments have to get their most important reforms done quickly, or they lose momentum. A five-year term essentially boils down to a maximum of 12-18 months or effective political work-life, unless Modi gets an extraordinary stroke of luck - like UPA-1 received in terms of tax bounties.

Modi will not have a honeymoon period extending beyond this year. He should move quickly to get the difficult things done.