Populism and investor-friendliness can't coexist
At some point, the government needs to make up its mind on where it is going. It cannot in the morning decide on a strategy to push the populist Food Security Bill—the UPA coordination committee is to meet on this later today and an all-party meeting is likely on June 7—and in the evening hold a meeting to find ways to push through stuck infrastructure projects where banks have already advanced upwards of R50,000 crore worth of loans. At one level, there is no contradiction; indeed, both are about spending more money which, as the latest GDP data shows, the economy so desperately needs. At a deeper level, the question topmost on the minds of investors is whether the government is serious about reforms or whether it just wants to be populist. The food Bill is the best example since, apart from being a waste considering it relies on the same broken PDS that has leakages upwards of 40%, it is in direct contrast to the Aadhaar-linked direct benefit transfer (DBT) the government is working on. The UPA needs to push DBT and spend effort on resolving the huge administrative logjam that this is stuck in, not push a Bill that is the very anti-thesis of DBT. It is similar populism that has ensured the FDI policy on multi-brand retail has still not taken off. Despite knowing the $1 million definition for SMEs—from whom mandatory outsourcing is to be done—is a deal-breaker, the government refuses to issue any clarifications on this nor on the equally ridiculous 50% mandatory investment in back-end infrastructure.
How critical it is to revive investment is best illustrated by the GDP data which shows the other two legs of growth—government and private consumption—have collapsed over the past several quarters. While government expenditure can’t be revved up too much for what it will do to the country’s precarious ratings, private consumption can’t grow with the economy collapsing to a decadal low of 5% in FY13. While the government has cleared $15 billion worth of stuck projects, getting the projects off the ground will also take a while given how leveraged industry is; also, many of the projects were bid for in more euphoric times and look a lot less viable today. This means a combination of different types of effort. If banks lean on India Inc to repay debt—and that’s what the new Mahapatra norms will do to some extent—there will be distress sales which will make the same projects viable for other investors. At the same time, the government needs to clear policies like coal-price pooling, bringing in private investors into coal mining, issue necessary clarifications on FDI in multi-brand retail, start renegotiating with investors on PPP projects … in other words, if FY14 growth has to be anything more than the 5.5-5.7% that looks possible right now, the government needs to come out all guns blazing on reforms; this cannot be the task of just one or two ministers. And unlike Infosys which has fallen back on a tried and tested Narayana Murthy after its third remodelling failed—and even this may not work—the UPA has no one else to bail it out.