Events & Issues

New Delhi, 18 September 2012

Bold Economic Call

WILL IT BAIL OUT UPA-II?

By Col (Dr) PK Vasudeva (Retd)

The Opposition has been accusing UPA-II under Prime Minister Manmohan Singh of being in a state of paralysis in bringing economic reforms for much of its second term and being embedded in corruption and series of scams resulting in sliding of the economy, high inflation and extreme price rise, which to put it simply is suicidal for the aam admi.

Even the Time magazine dubbed him as an 'underachiever', and Singh has been tagged as a 'tragic figure' by the leading US daily Washington Post. A report published recently has described Singh as a 'silent' PM. ".....the shy, soft-spoken 79-year-old is in danger of going down in history as a failure."  Worse, it also claims that Singh is presiding over a deeply corrupt government!

Well, Singh and his team seem to have suddenly woken up on 13/14 September and decided to give a booster dose for the economy by announcing a slew of economic reforms across sectors, signalling its intent to get the country back onto the growth track thereby sidelining and diverting the attention of the Opposition from Coalgate and 2G scams for the time being.

Economists usually respond to slowdowns by taking recourse to various fiscal or monetary stimulus measures. In India’s case, the Government’s perilous finances rule out the first, while persistent inflation makes monetary easing, too, difficult beyond a point. But there is a third option: ‘Supply side’ policy stimulus that aims at revival of the investor’s sentiment through a strong demonstration of the Government’s commitment to reforms.

This is precisely what the Government has sought to do by steeply hiking diesel prices and capping the number of subsidised LPG cylinders per household (six per annum); allowing global supermarket chains to operate in India with majority ownership (51 per cent FDI in multi-brand retail); allowing 100 per cent single brand FDI notification with the requirement of 30 per cent local sourcing; permitting overseas airlines to take up to 49 per cent stake in domestic carriers; opening up direct-to-home and digital cable network services to 74 per cent foreign direct investment (FDI); and clearing partial sale of governmental equity in four State-owned companies.

The fact that all these decisions came within a 24-hour timeframe shows the Government’s intent to loudly proclaim to the people as well the world that it is no longer gripped by a policy paralysis.

In addition, a full Planning Commission chaired by Singh on 15 September approved the 12th Five-Year Plan document that seeks to raise the average annual economic growth during 2012-17 period ending March 2017 to 8.2 per cent from 7.9 per cent achieved in 11th Plan.

Undoubtedly, there is economic sense to each of the above moves. The alternative to a diesel price increase was to allow oil companies to bleed to death and finally collapse. Permitting a Walmart or Tesco to open stores is largely a matter of choice. If West Bengal, Uttar Pradesh, Bihar and some other States do not want these chains, they can simply deny them the shops and licenses or sales tax registration numbers. However, if Haryana or Rajasthan feel the entry of foreign retailers would expand the universe of buyers for farmers’ produce, how can other States object?

What accounts for this sudden late burst of reform activity, much in the manner of a pinch-hitter trying to make up for a poor run-rate? A deepening slowdown, plus the limitations of addressing it through conventional fiscal and monetary policy tools, is an obvious economic explanation. But politically, too, a series of scam revelations have put the Government on the back foot, so much so that it stands to lose little by doing things the Congress party is not naturally inclined to. “If we have to go down, let’s go down fighting” is something Singh, is said to have emphasised. Indeed, good economics makes for good politics in the long run.

The Reserve Bank of India stated there is a need to further improve foreign direct investment inflows in sectors such as insurance, retail, aviation and urban infrastructure.  The apex bank, which has made this suggestion in its Annual Report for 2011-12, noted this will augment non-debt creating flows and keep the composition of India’s external liabilities at a comfortable level.

On the apprehensions over FDI in multi-brand retail, the RBI said international experience on the whole suggests that allowing FDI in retailing space leads to increased competition. Well, the domestic industry hopes that the spate of economic reforms announced by the Government will be a “mood lifter”, improving India’s global perceptions and have a positive effect on its sovereign rating.

The President of CII Adi Godrej in his response stated that the announcements have “restarted the reform process” and that easing FDI norms would help mobilise capital into these sectors and improve India’s current account deficit situation. “Increasing FDI caps in broadcasting industry to bring it at par with telecom sector will also facilitate the process of convergence in communication and entertainment technologies and attract more players in the cable networks sector,” is another assessment.

Likewise, on opening of FDI in multi-brand retail, FICCI President R.V. Kanoria, stated that the move signals to the investor community that India is committed to furthering reforms. In fact, the reforms announced are perceived as steps in the right direction by rating agencies, and it might save India from a sovereign downgrade. Rating agency Standard & Poor's (S & P), which in June had threatened to downgrade India's sovereign ratings, on 17 September welcomed big-ticket reform measures by the Government, saying the steps would serve as a medium-to-long term positive for the macro-economic conditions.

Similarly, rating agency Moody's said the Indian government's decisions like raising diesel prices, sale of part-stake in public sector companies and liberalisation of FDI in the retail sector would have minimal effect on the country's credit profile. Fitch Ratings said the reforms announced last week at first glance appear credit-positive.

In addition to the political inferno, the nation has the mammoth corruption scandals. Would a forward-looking businessman go gung-ho investing in such a country? Such scandals could hit all – the corrupt and the honest. Moreover, the Coalgate and the 2G issues have now resulted in the termination of many licences. The message we are sending out is that of a corrupt country with a Government that will say something today and will likely reverse the same thing the next day. 

Foreign governments cannot be expected to understand the Indian political, social and economic reality. Therefore, while FDIs in several sectors might be in line with the direction of the ‘growth’ of the economy, the results will not be as desired because of the glitches in implementation. Moreover, the foreign businessman is unlikely to jump at any and every loosening of FDI limits.

In 2012 we are witnessing huge corruption/scams, political turmoil, disempowered bureaucracy, disillusioned citizens and confused investors. UPA-II’s last-ditch political tricks at playing with FDI are less likely to meet with success. ---INFA

(Copyright, India News and Feature Alliance)