Political gamble on economic reforms
by Virendra Parekh on 27 Sep 2012 5 Comments

Congress has tossed a coin in the air. If the party calls right, it will have a fresh tenure of batting at the Centre. If the call proves wrong, it may face an innings of bowling and fielding, a thoroughly non-appealing prospect. This is the long and short of the sudden burst of hyperactivity over economic ‘reforms’ in the last fortnight. One must give it to Prime Minister Manmohan Singh. He has timed his moves perfectly well, both in calling the bluff of Mamata Banerjee’s TMC and in making a direct appeal to the people of the country to strengthen his hands “so that we can take our country forward and build a better and more prosperous future for ourselves and for the generations to come.”


On the economic front, the mood of resigned despondency and helpless drift has been transformed into one of optimism and positive expectations. Politically, he has restored initiative to the Congress party and, at least for the time being, effectively relegated Coal-gate and other scandals to the background in public discourse.


The strategy is now clear: shed the ‘policy paralysis’, focus on the economy, boost investor sentiment, shore up business confidence and seek people’s support for measures opposed by other political parties.


Doubtless, the first round has been won. Even as the mercurial Mamata Banerjee parted company with the UPA-II on the issue of diesel price hike and FDI in retail and aviation, Mulayam Singh Yadav stepped in to support the government from outside. This has helped the prime minister win the vote of confidence in financial markets. The BSE Sensex closed the week ended September 22 at 18753—the highest in 52 weeks after gaining 986 points (5.5 per cent) in the last two weeks. The rupee has surged to a four-and-half-month high of Rs. 53.45 against the dollar. FIIs have poured over Rs. 8000 crore in the Indian bourses in the last two weeks.


So, is it time to announce that the government and the country are back in business, all our economic ills will soon be cured and the economy is firmly placed on the road to high economic growth? Most crucially, will the kind of the measures announced so far enable the Congress and its allies to win the next Lok Sabha elections in 2014 – or earlier?


Far from it. Except for FDI in retail, the measures announced so far are broadly in the right direction. The painful hike in diesel price and the capping of subsidy on LPG cylinders had become inevitable in the given circumstances. However, it would be a mistake to see these measures as path-breaking initiatives or game changers. Even in areas where the government has chosen to act, it has not gone the whole hog, but stopped short of real long term reforms.


For instance, although diesel and LPG cylinder prices have been raised by significant amounts, they would help reduce fiscal deficit only marginally and meet only a small part of the losses made by oil companies on these products, making further hikes inevitable. The real reform would be to remove any government role in determining fuel prices and allow them to fluctuate in relation to input prices in a genuinely competitive market.


Allowing FDI in civil aviation was long overdue. It might help resurrection of mismanaged airlines like Kingfisher, and bring more experience into all. Jet Airways has been talking to Etihad. GoAir and SpiceJet, promoted by non-professionals, may attract foreign airlines. A real reform would be to include Air India in this list. Does the government have stomach for it? 


The commerce minister would have us believe that FDI in retail will transform agriculture, give the farmer more remunerative prices, a better deal for consumers, and not hurt the small retailers. Soonta bhi diwana? (Is the listener also dud?)


India is desperately trying to avoid a ratings downgrade. But the government has opened the floodgates to external commercial borrowings (now even by unlisted companies) sweetened by lowering withholding tax from 20 per cent to 5 per cent. This will only weaken further the perception of the economy as the external debt-to-GDP ratios rise further.


The rating agencies are highly exercised over the large and burgeoning fiscal deficit. The rising deficit, since the start of UPA-2, is due to the implementation of the many social welfare schemes that Sonia Gandhi pushed through, hoping they would result in an avalanche of rural votes. All of them have become another source of illegal incomes for officialdom and politicians. Unless social scheme expenditures are significantly reduced, neither high deficits nor persistent inflationary trends will moderate.


The measures taken and proposed are marginal, not major. They will not give a kick start to much faster growth. They do not address even basic requirements. For example, there is no mention of administrative and judicial reforms, overhaul of selection and promotion procedures, fixing of accountability at individual levels, penalties for non-performance and for corruption, far less discretionary powers, watertight procedures for offering natural resources, etc.


This government has not understood what reforms are needed. Domestic and foreign businessmen have been rightly deploring the large number of approvals required for investments to fructify, delays in land acquisition and in getting environment clearances, problems in electricity supply, water shortages, the numbers of inspections and permissions needed, making India among the most difficult countries to start a new business.


The problem of unemployment cannot be addressed without a radical reform of labour laws. By overprotecting existing jobs, these laws have hampered creation of new jobs in the organized sector and undermined the sense of responsibility and accountability in highly unionized sectors including government offices. If you cannot lay off surplus staff in a business downturn, why employ more people in the first place? Use more machines and, of course, contract labour.


Instead of addressing these basic challenges, largely of our own creation, the so-called ‘reforms’ are focused on attracting foreign investment and foreign investment alone. In the name of ‘reforms’, key sectors like retail trade and pharmaceuticals are planned to be handed over to foreigners. That should be a cause for concern.


For all the bravado and rhetoric, the political dividends that the ruling coalition is eyeing may not come its way. Bookworms and industrialists may be applauding, but the measures unleashed so far have left ordinary folks cold. There is little to make their life easier. If anything, their lot will worsen at least in the foreseeable future.  


Common people are being plundered by corruption at every stage in every walk of life and groaning under the weight of high cost of living, largely resulting from policies pursued by the UPA II. The huge hike in diesel prices with its cascading effect on prices of all products will leave them further distraught. EMIs have already gone up sharply as a result of high interest rates and consumer durables and residential accommodation have already gone beyond the reach of the middle class. That priceless pearl of wisdom, ‘money does not grow on trees’, is a cruel joke on the people all whose energies are exhausted on making two ends meet.


And now the Prime Minister seeks support of the people to create a bright future for all, appeals to them make sacrifices and talks of going down fighting. That would have been fine, even rousing, if he had not been presiding over the government for the last eight years. At this stage, he has no moral authority to call for support or sacrifices.


The present condition of the economy is not a sudden development. Growth had been plummeting, inflation had been soaring and government finances had been going haywire for several quarters. The prime minister, a renowned economist, did nothing to reverse the drift.    


Worse, under the very nose of this Prime Minister, his ministers have been plundering the country with both hands. One mega scandal after another kept coming out with sickening regularity. Precious and scarce natural resources like telecom spectrum and coal were handed out to cronies, with colossal losses to the exchequer. Even as disconcerting details kept tumbling out on Commonwealth Games, 2G Spectrum scam, Coal-gate, the Prime Minister donned the mantle of a distant onlooker as if he had nothing to do with this murky state of affairs. And now he wants people to shoulder the burden of mending government finances.


In the last five years, Dr. Singh has staked his government only on two issues: the nuclear deal with the US in 2008 and FDI in retail now. On both issues, he sold the country down the river for the benefit of foreigners, especially Americans. On both issues, the attack of do-or-die braveness came shortly before the elections. Is it merely a coincidence? Dr. Singh talks of going down fighting, but for whom is he fighting?    


Congress sympathizers would have us believe that none of this really matters, what matters is the dream of the middle class to shop in the air-conditioned comfort of a foreign multi-national retail chain and this one pleasure, as and when it materialises, will make the middle class forget all its other woes and vote for the ‘reformist’ government. Time will tell.


The author is Executive Editor, Corporate India, and lives in Mumbai  

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