Raising cooking gas prices would slam the poor.

Modi's Little Bang Reforms

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
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For Indian Prime Minister Narendra Modi, Diwali came early this year when his Bharatiya Janata Party won crucial elections in the states of Maharashtra and Haryana. He's celebrated with a bang -- a little one.

On Oct. 18, a day before election results were announced, Modi's government deregulated retail diesel prices. On Oct. 20, the administration issued an ordinance intended to sort out the mess in India's coal industry, which had been thrown into turmoil by recent Supreme Court decisions. Many supporters expected bigger things from Modi by now, five months after his inauguration: perhaps a lifting of all fuel and fertilizer subsidies, or the privatization of state-owned Coal India. Modi's more modest reforms, however, may be a smarter way for India to move forward.

Expectations that the forceful Modi would suddenly rip up decades of bad policy after taking power were always overblown. The prime minister seems intent instead on working through gradual, calibrated changes to India's decaying policy framework. Take the ordinance on coal. A Supreme Court ruling invalidating the allocation of over 200 coal blocks handed out since 1993 left dozens of private companies in doubt about their power supplies. The government will now reassign those blocks using a transparent, online auction rather than a murky and easily corrupted bidding process.

The power, steel and cement companies that depend on these coal supplies now have a degree of clarity. Coal-rich states will benefit, as their governments will get the revenue from the auctions rather than New Delhi.

The ordinance falls far short of denationalizing the coal sector, which is ultimately the only way to solve India's perennial power shortages. But any such move would inevitably have failed, given that Modi's party still lacks a majority in the upper house of parliament. Worse, a futile attempt would probably have derailed even smaller-bore reforms of the sector. The new ordinance contains an enabling clause that recognizes the need to open up coal mining to private competition. If the BJP continues to gain seats in upcoming state elections, Modi could be in a position to invoke that clause before the end of his first term.

The prime minister doesn't need upper-house approval to lift fuel, food and fertilizer subsidies, which together account for a third of India's huge fiscal deficit. The regulation of diesel prices was a particular scandal, benefiting mostly rich SUV drivers and truck transportation companies. Ending it -- especially while global oil prices are depressed -- was a no-brainer.

To go further, however, would also have provoked crippling resistance. Raising the prices of cooking gas and kerosene, both overwhelmingly used by India's hundreds of millions of poor, without setting up a buffer of some sort would have been irresponsible and rightly opposed. Modi says he plans to rationalize those subsidies by replacing them with cash transfers to the poorest citizens; the same would apply to food and fertilizer subsidies. First making sure that the transfer system is workable and uncorrupted makes good political as well as policy sense.

This style of incremental reform may be too slow to propel India back to double-digit growth, as some fear. But the overhang of bad policies in India is too acute to be solved in a matter of months. Unlike his predecessors, Modi at least isn't creating any bad new policies. In India, that counts as progress.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net