In this Think Pragati article, Associate, Sharmadha Srinivasan shares her analysis on how we can bridge the gap between the need for long-term reforms and the push and pull of short term populism. She writes,
"Reforms tend to have benefits that are widely dispersed and costs that are concentrated on a few. A second strategy for increasing politically feasibility of structural reforms would be to adequately compensate the losers of a reform policy. This might include workers at risk of displacement, who tend to resist change. Compensation money can be generated directly from the beneficiaries of the reform. For example, when price-support mechanisms for the dairy industry in Australia were finally removed, farmers were provided with adequate compensation, financed from a levy on milk consumers. This reflected the reduction in the value of their dairy holdings and facilitated adjustment within the industry.
The GST reform undertaken by this government is a good example of how this strategy has been employed in India. States opposing the tax reform, fearing loss of revenue to their own coffers, were placated by the Centre’s decision to compensate them for their revenue loss. However, at times there could be a practical difficulty in implementing such compensation as it may not be clear ex-ante as to who the potential losers and beneficiaries of a reform are. "
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