Column

The president’s address to parliament on Thursday offers a ray of hope on the UPA government’s approach to reforms. The first five years were substantially a washout, with reforms becoming a dirty word. Now, with the Left out of the way, everyone believes that reforms can go ahead.

It is a half-truth at best. Loud-mouthed Left leaders may have vitiated the atmosphere for reforms in pensions, foreign direct investment and disinvestment, but the Congress’ own timidity was also to blame. It chose not to engage the Left in a compromise, and, in the bargain, lost out on reforms.

If the second UPA government is to reverse this, it will have to think its strategy through and find a politically-effective way to move ahead. In India, reforms have to be pushed initially by stealth till the benefits become apparent to everybody. The labour rationalisation at public sector banks was achieved by dangling an attractive voluntary retirement package over the heads of obstructive unions. When employees stampeded towards the exits, the unions had to eat crow.

E-ticketing on the railways looked like a benefit targeted only at those with PC and internet access. But when ticket sales took off vertically, nobody could afford to reverse this public service. Not least the touts in the railway administration. In short, reforms work whenever they do not directly threaten the vested interests in the initial years. Here are some suggestions on how reforms can be pushed under the radar.

First, it would be wise to legislate a Golden Share for all public sector companies. A Golden Share gives the government 51% voting rights in specially defined circumstances even if its actual economic stake is well below that level. This will ensure that even if a company is completely divested, the government can intervene to impose an order that is in the public interest. It could be done to control oil prices, if needed, or change the management, when that is in the public interest. This clause should obviously be used sparingly so that efficiency is not impaired, but it will allow the government to proceed with listing public sector shares and divest strategic holdings without being accused of selling out. Even the Left should not object.

Second, the government needs to acknowledge that opposition to reforms comes not only from the Left, but many others, including private sector rivals, the bureaucracy, the government's own allies, and the unions. Take the proposed public offering of $10 billion for Bharat Sanchar Nigam Ltd (BSNL) a few years ago. A successful issue would have made this public sector company the most valuable telecom player in India. It should have warmed the cockles of the Left. But a powerful BSNL would not have suited its private telecom rivals. A $10 billion issue would have allowed BSNL to dominate the market and dwarf them. The idea was killed even before it could be born.

More than the Left, it was the government's inability to stand up to its capitalist cronies that scuttled BSNL. Third, the UPA should give states a stake in divested companies. A lot of the opposition to disinvestment comes from states where public sector units employ a lot of people. If states are told that they will get a half-share from disinvested holdings either as grant or at zero interest for 20 years, they may see the benefits of reform.

Take the example of the aborted public offering of Neyveli Lignite during the last UPA regime. The issue was killed not only due to Left pressure, but M Karunanidhi’s last-minute intervention. It is surprising why the DMK, which survives in Tamil Nadu with Congress support, was not bought off with some sop or concession. If Tamil Nadu had something to gain from the disinvestment, its objections would have been more muted.

Fourth, subsidies must be paid in cash. This reform will be popular with the poor, while also cutting out middlemen. The best way to subsidise kerosene or cooking gas would be to give all eligible beneficiaries the cash equivalent of the subsidy. This way they can use the money to buy kerosene from the open market and avoid queues at ration shops. They could also choose to use the money for other purposes. Direct cash payments have been experimented with successfully in some states where the National Rural Employment Guarantee Scheme is in operation. Biometric cards are being used to ensure that only the intended beneficiaries get the cash.

Fifth, some subsidies should be shifted upstream. The fertiliser subsidy, for example, is paid to fertiliser companies when it is farmers who are the intended beneficiaries. A better option would be to free fertiliser prices, and pay farmers a higher support price for food procured. This has two advantages: one, farmers will use chemical fertilisers more sensibly since they now have to pay a market price; and two, the subsidy is effectively paid only on food procured by the government. The moral: to succeed with reforms, the UPA needs to think smart.