A turning point for Indian reform
Should Singh's government fall, it will strengthen the belief that good economics makes bad politics.

Reuters

Mamata Banerjee, Chief Minister of India's eastern state of West Bengal, gestures during a news conference after a meeting of her Trinamool Congress party (TMC) in Kolkata September 18, 2012. The biggest ally in Prime Minister Manmohan Singh's government pulled out of the ruling coalition on Tuesday, escalating a political firestorm over big-ticket reform measures launched last week to revive India's flagging economy. Banerjee had demanded the government reverse its decision to raise diesel prices and open the supermarket sector to investment from foreign chains such as Wal-Mart Stores.

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  • Is India’s government on the verge of collapse? @Dhume01

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  • “Indian politicians think sensible economics is at odds with smart politics.” @Dhume01

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  • How will the events unfolding across India affect the country’s political consensus on economic reforms? @Dhume01

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Is India's government on the verge of collapse? As of Thursday, with a key coalition partner withdrawing over economic policies announced last week, and much of the opposition calling for nationwide protests, the Manmohan Singh government's prospects appeared uncertain. The fate of this administration isn't only about the immediate politics here, it's also about a larger question: How will the events unfolding across India affect the country's political consensus on economic reforms?

Should Mr. Singh's government, re-elected in 2009, fall over its most controversial reform measure—allowing foreign retailers such as Walmart and Tesco to own a majority stake in Indian ventures—it will send the wrong message to a political class already skittish about making India's economy more market-friendly. On the other hand, should Mr. Singh survive, and use this opportunity to double down on reform, his gamble may well end up having the opposite effect.

Indian politicians think sensible economics is at odds with smart politics. If Mr. Singh revives India's growth—currently at 5.5%—and paves his party's path to victory in national elections, due no later than 2014, he would deal a severe blow to this conventional wisdom.

For now, though, all eyes are on the chief obstacle to economic progress, West Bengal Chief Minister Mamata Banerjee. Late last year, she derailed Mr. Singh's original attempt to open up retail by threatening to exit the ruling coalition with her Trinamool Congress party's 19 members of parliament, which would have left the Congress Party-led alliance short of the 272 seats it needs for a majority.

On Wednesday, Ms. Banerjee made good on her threat. (Her MPs are set to resign from the coalition Friday.) She accuses New Delhi of pursuing "an anti-people's agenda." In her book, this includes not only the retail opening, but also a decision to raise the price of diesel and slash the supply of subsidized cooking gas.

Ms. Banerjee's exit leaves the government dependent on "outside support" from parties that, though not formally part of the ruling United Progressive Alliance coalition, have pledged to back it in Parliament. These include two large parties from the populous Hindi heartland state of Uttar Pradesh, the socialist Samajwadi Party, and the Bahujan Samaj Party, which is traditionally backed by the state's lowest castes.

If push comes to shove in the shape of a no-confidence motion called by the opposition, these parties may stand by the government. Or they may pull the plug and gamble on improving their position in fresh elections.

The next few days will suggest how this plays out, but one thing is certain. The timing of last week's reforms, the most ambitious since Indians first elected the left-leaning Congress Party in 2004, could have been better.

Had Mr. Singh announced exactly the same policies in the first flush of his re-election in 2009—which his coalition won with a comfortable parliamentary majority—momentum would have been on his side. Instead, against a backdrop of slowing growth and a slew of corruption scandals, the idea of reform risks being tainted by association with a weak and unpopular government.

The only previous instance where Mr. Singh was willing to go to the mat for a policy rather than back off under pressure—the 2008 U.S.-India nuclear deal— has played into the opposition's hands. The nationalist Bharatiya Janata Party (BJP) on the right and the Communists on the left now portray the prime minister as a lackey of foreign capital, only exacerbates the issue. That means an electoral setback for Congress becomes more likely to be interpreted as a verdict on free markets, rather than on the ruling party's corruption, indecision and sloth in the past three years.

This unfortunate conclusion about the politics of reform would only deepen a trend begun in 2004 when Congress beat the BJP in national polls. Though shifting alliances and fluctuating voter turnout contributed to that result, in popular discourse the BJP is said to have lost because it chose to play up India's liberalization and growth through its campaign slogan, "India Shining."

Similarly, though the Congress Party's re-election in 2009 was probably in part because of the high growth on its watch, most pundits and politicians instead credit the inefficient and anti-reform rural jobs guarantee program and loan waiver for farmers. Now, by belatedly embarking upon reform at the peak of his unpopularity—a poll last month showed Congress losing nearly 40% of its 206 seats in the current Parliament and falling behind the BJP –Mr. Singh has increased the odds of India's politics drifting farther away from sensible economics.

What can be done? Under the circumstances, instead of backing off the Prime Minister should double down by pushing bigger reforms and making a case that he's doing this to revive growth and unleash Indians' entrepreneurial energies. His party's best bet of bucking defeat lies in returning the economy to the near double-digit growth it saw over the last decade.

Even if the strategy fails electorally, Mr. Singh will have the consolation of having tried to live up to his once stellar reputation as an economic reformer. The alternative is to go down in history as the proverbial "underachiever," as Time Magazine called him earlier this year, the listless leader who squandered an opportunity to transform his country's fortunes.

Mr. Dhume is a resident fellow at the American Enterprise Institute and a columnist for WSJ.com. Follow him on Twitter @dhume01

 

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