Budapest party chief says further reform is essential. Grosz is favored by many as Hungary's next leader

As a young Communist Party apparatchik, Karoly Grosz survived the 1956 Hungarian uprising and became an ardent supporter of Janos Kadar's conciliation policy. His political career has brought him to his country's top leadership and has made him the most likely front-runner among the few visible candidates to follow Mr. Kadar as Hungarian leader.

Budapest party chief Grosz and others insist that Kadar will at least serve out his present term, unless physical impairment intervenes. That term has three years to go before the next party congress. Kadar will be 75 years old in May, and after 30 years as its leader, he is still his party's best credibility asset at home and abroad.

``If you like, we exploit him,'' says Mr. Grosz. ``But we want to keep him as long as we can.''

Some lesser officials and rank-and-file party members seem less sure, however. ``The popular touch simply does not come across as it used to; it has become too paternalistic,'' says one. ``People have begun to think it is time for a change.''

And it appears to many right now that when that time does come, Grosz is the man for the job.

``Hungary,'' says one intelligent younger official, ``will need a strong man, and Grosz is that. Kadar has his own kind of strength, but it has always been in balancing the two wings [of his party]. For the future, leadership will have to be more decisive.''

Grosz discounts speculation about himself. Some say he is a ``hard-liner'' and ``conservative.'' In two hours of conversation, he emerges, certainly, as a very tough man - especially about the place of the party in society - but with a highly realistic view of Hungary's present difficulties and the solutions they require.

He applauds Soviet leader Mikhail Gorbachev, but adds: ``So far he is only surface plowing. Now he has to cut deeper.'' The same, he obviously feels, applies to Hungary.

``Reform is a constant and permanent part of our life,'' he says. ``Now we have to go further in genuine practice.''

This is not just a matter of making Hungary still more market-oriented - including a substantially bigger private sector, which he strongly favors.

Reform, he says, must also entail moves certain to be unpopular, such as:

Fearlessly using the new bankruptcy law to eliminate unprofitable enterprises. One big plant is already on the way out, with planned job retraining and relocation for its 2,000 workers.

Creating, within the next year or so, a personal income tax (the first ever in a communist state) and a value-added tax.

Tax collectors - 3,000 of them - are already being trained. And experts have gone to Britain to study its value-added tax system.

Establishing income differentials that recognize talent and effort. ``Mediocrity,'' says Grosz, ``has been too long a norm.''

He admits the political hazards implicit in all this.

``We shall be treading on very thin ice,'' he says, ``but there is no other way. We have to get people to see this.''