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)
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