That said, its important to put things in perspective. It is difficult to believe, for instance, that events such as Cyprus are not influencing the Sensexafter opening at 18926 yesterday, the market rose to 19082 and then tanked to 18793 in sync with European markets that fell with the Plan Bs for Cyprus not looking much better than the original. How much of the collapse is Cyprus and how much the DMK is difficult to say, but the Cyprus effect cant be insubstantial.
Similarly, while there is little doubt investments have stalled, some perspective is a good idea. Data from CMIE, for instance, shows the value of stalled projects is up from R1,50,000 crore in FY05 to over R8,00,000 crore by December FY13; the value of fresh project announcements, similarly, is down from a high of R22,00,000 crore in FY09 to a mere R4,00,000 crore in December FY13. The order books data for capital goods firms tells you a similar story of falling growth, as does the sale of heavy and medium commercial vehicles. From the point of view of actual investments on the ground, similarly, gross fixed capital formation is down from the heady 34.5% of GDP levels of Q2FY08 to about 28.7% in Q3FY13 (see charts).
But, and heres the important point to keep in mind: even at these levels, gross fixed capital formation, as measured by the CSO, was still R7,55,466 crore in Q3FY13, up around R80,000 crore from a year agoand the figure in Q3FY12 was around R40,000 crore higher than Q3FY11. None of this is to say investments are looking healthy, but merely to point out the bottom hasnt yet fallen out of the investments marketand thats why the Sensex is still at 18793, and not 15000. Despite all the uncertainty, the market is still trading at 12.8 times projected 12-month profits as compared to the MSCI emerging markets indexs 10.5 times.
After a while, it is obvious, if stalled projects dont get cleared or new projects announced, the gross fixed capital formation will fall. But this is where what the finance minister said about reforms not stopping comes in. Without a majority in Parliament, the government cannot introduce, much less hope to pass, Bills like those increasing FDI limits in insurance or pensions. But there are a host of actions that are purely administrative in nature, that do not require any Parliament approval.
Top on the list, for instance, is reduction in petroleum subsidies. The decision to eliminate the subsidy on bulk sales of diesel or to raise prices of retail diesel by 45-50 paise per litre each month is not something that needs Parliament approvalnor can it be the case that the Congress partys allies were in favour of it. This was a decision taken by the government after P Chidambaram returned to the finance ministry and, as such, is unaffected by the DMK pulling out.
No Bill was brought in Parliament, similarly, to raise Railway fares prior to the Railway Budget; nor does any Bill need to be brought to Parliament to, for instance, privatise the New Delhi Railway Station and convert it into a swank global-style multi-storeyed station with hotels, shopping malls and office buildingsthis is what the government did with the Delhi Airport some years ago. Clearing the R8,00,000 crore of stalled projects CMIE talks of, similarly, doesnt need the support of alliance partnersthe defence ministry, which is headed by a Congressman and the environment ministry headed by a Congresswoman, for instance, are holding up most of these projects. Whether the reasons are valid or not is not the point, the point is they are not controlled by alliance partners.
The problem, or the solution if you like, lies in the fact that, by and large, the UPAs reform or anti-reforms agenda has emanated from the Congress party, not the allies. The Food Security Billwhich, fully implemented, can play havoc with the fisc and which the Food Corporation of India is not in a position to implementwas not the idea of an alliance partner, it was the brainchild of the Congress Party. The Right to Education Bill, which seeks closure of all unrecognised schools if they dont conform to norms within a period of 3 years, was a Congress idea. Ditto for the Homestead Bill that is in the drafting. Whether it is getting defence minister AK Antony to clear oil exploration or petroleum minister Veerappa Moily allowing oil PSUs to hike prices in keeping with what the Cabinet has cleared, all of these are decisions that can be taken if the Congress party is in favour of them. Fixing the telecom mess (more in a later column) is another reform totally in the Congress partys hands, as is advancing the PSU divestment calendar or offering attractive discounts on themwatch how this changes the FII mood. Whether the Congress party has the appetite for getting things fixedapart from the diesel hike, whats been outlined is hardly reformis really the question.