India story begins to unravel PDF Print E-mail
Thursday, 24 November 2011 00:17
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India story begins to unravel
Intro: PM right to say India could go the same way as the West if political parties don’t cooperate to pass critical legislation
Blurb: The rupee’s huge fall — 14.3% vs the won’s 2.2% and the baht’s 3.9 % —is not just because of the global crisis. The combination of rising populism and many anti-business decisions have contributed to this in no small measure


Prime Minister Manmohan Singh is absolutely right when he tells Opposition leaders that if they don’t get together to pass critical legislation, India will also meet the same fate that various other countries are witnessing—it sounds alarmist, but growth in areas such as investment has ground to a near halt, forex reserves that looked comfortable yesterday, look a bit fragile in the face of a collapsing rupee … This has spooked the markets further—they fell 2.3% on Wednesday, and by 6.4% over the last seven days.

There is little doubt the crisis in the US/Europe has hit India’s prospects, but India’s internal politics has magnified this. Just look at the rupee to understand this. While the rupee has fallen 14.3% against the dollar over the year, the South Korean won fell just 2.2%, the Taiwanese dollar 4.1%, the Malaysian ringgit 3.7% and the Brazilian real 8.7%. And there are few signs this can be quickly reversed since RBI has pointed out, rightly, that the flood of forex movements is so large, its interventions will not help.

The slowing in exports has played a role, as has the outflow of FIIs, but it isn’t large enough to justify the rupee’s collapse, the larger story is one of FDI stagnating and that is largely related to sentiment, and the BJP’s role in this cannot be understated. Critical legislation cannot be passed unless the Opposition is willing to cooperate. A good example of this is the Pension Bill. The BJP’s demands here—that the FDI limit be inserted in the Bill itself and that pension firms be mandated to offer at least one fixed return scheme—are unreasonable and, were the BJP to oppose the Bill in Parliament, this would be a shame.

Similarly, it is not quite clear what the BJP hopes to achieve with its stance on P Chidambaram. Assuming what it says about Chidambaram is true, the matter is before the Supreme Court anyway—the fact that it is being pursued by someone who has no love lost for Chidambaram, and the media’s glare on it, will ensure the matter is not given a quiet burial. So why does the BJP need to raise the political temperature to boiling point?

That said, the biggest problem lies with government policy that cannot be laid at the Opposition’s door. Indeed, RBI Governor D Subbarao referred to some of the problems in a lecture two days ago when he said that while MGNREGA was a desirable programme for the jobless, it had raised the minimum wage in agriculture and, in the absence of productivity-enhancing steps, this would have adverse consequences. He also spoke of the impact of the proposed Food Security Bill that seeks to dramatically hike the proportion of people getting subsidised foodgrains. A fully rolled out Food Security Bill will ensure the fiscal deficit remains permanently out of whack, apart from hiking prices since the government’s purchases of foodgrain will go up dramatically.

Add to this, as has been pointed out before, the government’s anti-business attitude. The 3G case, in the news since heads of three telcos have just written to the Prime Minister on this, is a good example. Telcos paid around R70,000 crore for the 3G spectrum and, apart from the fact that even their existing licences permit intra-circle roaming (that is, an Aircel subscriber in Delhi can use Vodafone’s 3G spectrum), the government had specifically permitted this in writing (http://www.financialexpress.com/news/column-kill-it-before-it-grows/ 869779/). At the time of the auction, firms asked the government whether intra-circle roaming would be permitted and the government said it would. Given this, the government threatening to take action against these firms is just getting investors nervous. Which is why it is a good thing that Bharti Airtel’s Sunil Mittal, Vodafone’s Vittorio Colao and Idea’s Kumar Mangalam Birla have written to the Prime Minister saying that they are willing to surrender the 3G spectrum if the government gives their money back as there has been a clear breach of contract by the government. There are various such examples of firms who’ve had to face an unnecessarily hostile government in the recent past—UTI-T Rowe Price, Lavasa, Cairn, Vedanta, Posco …, the list is too long to recount.

If the populism and anti-business attitude wasn’t bad enough, the government is now proposing that it get PSUs to shell out R40,000 crore so that it can meet its disinvestment target—this will be done by cash-rich PSUs buying the government’s shares in other PSUs. The PSUs need the money to invest, but the government wants to take it away without so much as a by your leave. And that’s when, in the case of the oil sector, the PSUs are already bearing a burden of over R1 lakh crore for subsidies.

In the short run, it is obvious, there is little that can be done to alleviate the pain industry is feeling—RBI has already said it cannot intervene to make the rupee appreciate and unwinding of the interest rate hike will take time. Indeed, with the rupee going the way it is, inflationary pressures will only rise.

In the long run, however, there is nothing that a large dose of reforms cannot fix. Just allowing private miners in the coal industry, for instance, will bring in billions of dollars of investment (Australian mining firms, desperate to enter India, invested $5.9bn in new exploration and $56bn in existing mines in 2010-11 in their country!), apart from dramatically easing the problem of stagnating supplies. Similarly, if the Pension Bill is cleared, and the government does something about the other irritants (high and fixed PPF/EPFO rates), this will bring in large sums of FDI. So will opening up the retail sector. High petroleum subsidies are what drove out RIL and Essar from the oil marketing business … fixing this doesn’t require the government to stop subsidies—just give the same subsidies to private players as well—but just see what it does for the investment climate.

So, the Prime Minister’s right, the Opposition needs to cooperate if India is to get back its mojo, but more than the Opposition, it is the government which needs to get its act together. Many reforms require the Opposition’s cooperation; a greater number don’t.


Last Updated ( Friday, 25 November 2011 13:03 )

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