Incomplete Reform Agenda Is India's Elephant in the Room

By PAUL BECKETT

Whichever government comes to power in India on June 2, it will be handed, in effect, a very fat folder marked "Unfinished Reform Agenda."
By almost every realistic scenario for how the next government will be formed, that folder is likely to be overlooked, to the frustration and detriment of long-term investors.

Many of those needed changes -- in foreign-investment rules, labor laws, pensions and further privatization of certain industries -- have been on ice for several years because the Congress Party-led government was hamstrung by its left-wing allies.

Even after the Left Front bolted the coalition last summer, because it opposed the U.S.-India nuclear deal, hopeful talk that the government might slip through a few measures before the end of its term basically came to naught.

A new government led by the Congress Party will hardly fare much better. The dire global economic environment and the quasinationalization of financial services in Western countries gives left-wing antireformers in the party all the firepower they need to nix efforts to revive reform measures.

Meanwhile, Congress's key rival, the Bharatiya Janata Party, or BJP, is expected to garner even fewer seats than Congress. So any coalition it forms will be weaker.
There is a less-likely third scenario: a coalition government formed by neither of the national parties but most likely including the Left Front. To this group, market-oriented change is taboo.

True, India is faring better than much of the world, in part because it hasn't thrown open its economy. With global investors less fearful these days, the country's stocks are up 27% in the past month.

But it is worth remembering that even during its best years recently, India's economy effectively maxed out at around 8% annual growth, despite its capacity to expand much faster on a long-term basis. Failure to act on reforms -- especially in increasing employer flexibility and allowing greater foreign investment in retail, banking, media and real estate -- risks consigning India to the status of a nation that is permanently on the verge of realizing its potential.

That would make it a less appealing investment.

Not everyone is pessimistic. Chengalath Jayaram, executive director of Kotak Mahindra Bank, says any new government that doesn't involve the Left Front has a chance at enacting some reforms to keep the liberalization moving slowly forward.

He uses the analogy of a lumbering elephant: It isn't fast, but "once it moves in a particular direction, it rarely reverses course."

Fair enough, but once it stops, it also is very hard to get moving again.