Hung House: Small Players With Big Role May Log Out Reforms

Updated: Apr 30 2004, 05:30am hrs
Economic reforms are irreversible. This has been emphasised time and again by economic commentators, rating agencies, international bankers and other stake holders. Goldman Sachs, in its recent report, India: Realising BRICs (Brazil, Russia, India, China) Potential, pointed out: With still much scope for reform, Indias healthy progress in liberalisation; private sector-led development; and newly established political support for economic and structural reforms suggest that India could be setting up the necessary conditions to support the type of long-term growth path we project. If these conditions continue to strengthen, India may well realise its potential as the sleeper success story of the BRICs.

More recently, the Asian Development Bank (ADB), in its Asian Development Outlook for 2004, projected Indias gross domestic product (GDP) growth rate at 7.4 per cent for 2004 and 7.6 per cent for 2005. The ADB also stressed that economic liberalisation reforms, support for private sector development needs to stay on track. The rating agency, ICRA, in its recent analysis of economy said: There is some evidence of a likely investment up-cycle, which is expected to kick in towards the end of 2004. The strength of this up-cycle will be determined to some extent by the outcome of the elections to the Lok Sabha....and the overall business climate obtaining towards the end of the calender year. This round of investment will be far more cautious than the one that immediately followed on the onset of economic reforms in 1991. With a moderate to strong investment upturn, and a return to trend of agricultural growth, and no significant adverse developments on the weather, security or external economic fronts, fiscal 2005-06 could see growth in the region of 7.0 to 7.5 per cent.

The underlying assumption of these politically neutral agencies is that there will be a government after the Lok Sabha elections which will not reverse the economic reforms programme, over which, it is believed, there is a national consensus. Economic pundits writing these reports have not thought of a scenario where there could be a hung Parliament and smaller outfits like the Samajwadi Party, Rashtriya Janata Dal and Communist Party of India (Marxist) will play the role of king-makers, dictate policies and change the course of the Indian ship.

Recently, Arvind Virmani, director and chief executive of the Indian Council for Research on International Economic Relations (Icrier) highlighted the impact of ideological transformation on growth in in a working paper, Indias economic growth: From Socialist rate of growth to Bharatiya rate of growth. He pointed out that, with a change in orientation of the government from socialism to market there was a change in the rhetoric of the government and of intellectuals and consequently in the atmosphere/environment in which private agents and investors operate. This change in orientation started in the late 70s when the still socialist oriented Mrs Indira Gandhi broke the railway strike in 1976. The change continued with the coming to power of the so called right-wing political parties such as the Congress (O) and the Bharatiya Janata Party (though some of the coalition partners were Indian socialists). There was consequently an acceleration of GDP growth from the socialist growth rate of 2.6 per cent per annum to 5.6 per cent annum during the Modest Reform sub-phase of Bhartiya Rate of Growth (BRG).

Dr Virmani further said: We seem currently to be stuck at the Bharatiya rate of growth of around 5.8 per cent annum. In fact the trend rate in 2003-04 appeared to be about 1 per cent point lower than this because of the very sharp cyclical decline in growth that occurred in 2002-03. With the cyclical recovery of the economy to a predicted 8 per cent growth in 2003-04 and a forecast of 6 per cent growth rate in 2004-05, the economy is returning to the Bharatiya rate of growth trend of 5.8 per cent per annum.

What is common about the think-tanks and individual economists is that there is need for more reforms. The reforms should be accelerated to take India to a high growth trajectory, 8 to 10 per cent, as is being conceived by the BJP and the Congress. None of the two major parties are opposed to economic reforms per se. There is an apparent consensus about reforms between these two major political parties. Unfortunately, their views on economic policies and reforms are not shared by the small political parties which can play a bigger role in the absence of a clear mandate. The panic was evident in the way the capital market behaved after the exit polls projected a hung Parliament.

In the event of a hung Parliament, Samajwadi Party, Rashtriya Janata Dal and the Communist Party of India (Marxist) will become important. Mulayam Singh Yadav, the Uttar Pradesh chief minister and head of the SP, is nurturing the hope of becoming Prime Minister. The SP had 26 parliamentary seats in the outgoing Lok Sabha. The CPM, which was the third largest party in 13th Lok Sabha with 33 members, will again get a chance to play a critical role in the formation of the government. The communist parties include CPM, Communist Party of India, All India Forward Bloc and the Revolutionary Socialist Party, and have a combined strength of 42 seats in the outgoing LS. The fortune of the Left parties depend less on their performance and more on the poor performance of larger political parties.

What will these parties do after assuming power in case of a hung Parliament What economic course will a minority coalition, backed by CPM, follow The best course for them would be to ignore their political manifestos and carry on economic reforms. That may be hoping against hope. The second best course would be to adopt a middle path pursuing policies without ignoring the market realities and expectations. The worst option would be to pursue the policies mentioned in the political manifestos of the SP, RJD, CPM and CPI with an ideological zeal.

Going by the manifesto, SP will ban import of luxury and fancy goods in a bid to check consumerism. It will not even encourage their production till the basic necessities of all are taken care of. The party will cap investment of limits of income and expenditure. It also promises to extend reservation for Scheduled castes/Tribes, other backward castes and Muslims to the private sector. SP will also oppose privatisation of profit-making public sector undertakings. It promised to cancel the patents granted within the framework of the World Trade Organisation (WTO). SP also promises to come out with a minimum wage policy. A house to every family has also been promised. It proposes a kisan pension scheme to cover all farmers.

The RJD manifesto promises to provide a secular government with thrust on agriculture, rural development and employment generation. It pledges to ensure social justice and removal of regional imbalances. The party has also expressed its opposition to the privatisation policy of the government. It says that privatisation of profit-making PSUs has threatened the survival of small industrial units. On agriculture, the RJD promises to continue land reforms and transfer of land to tillers. It vows to improve the plight of farmers. The party also expresses its commitment to continue subsidies on seeds, fertilisers, diesel and other goods used in the farm sector.

The CPIs manifesto talks about an alternative path of development and expresses its opposition to the neo-liberal policy of liberalisation, privatisation and imperialist globalisation. It promises to implement land reforms and stop all moves to reverse ceiling laws for corporatising agriculture and prohibit sale of agricultural land to foreign companies for agri-business. It promises to make provision for cheap credit facilities for farmers.

The CPI promises a comprehensive central legislation for agricultural workers, guaranteeing minimum wages, social security measures, including pension. It pledges to protect SSIs, tiny, cottage and self-employed sectors as main avenues of productive employment. These sectors will be protected and further encouraged through provision of cheap credit, and marketing facilities. The party has reservations on the opening of retail trade. It is strange that this government is offering all facilities to MNCs who are taking over retail trade in major cities by setting up huge department stores. Retail trade traditionally finds employment and livelihood for millions. The CPI opposes FDI in retail trade. Withdraw permission granted to Metro GmbH, Shoprite Checkers and such others. It also promises to make the right to work a fundamental right. Its manifesto adds: Public works with state funding that create fresh employment, such as expanding primary and elementary education, literacy campaign, irrigation and flood control, crash programme for providing drinking water on priority basis, constructing highways and connecting roads to be undertaken.

The CPMs manifesto is most important, as in the eventuality of a hung Parliament, it would give issue-based support to the minority government. The CPM, which is the third largest party with 33 members in the outgoing LS, is expected to retain its strength at nearly the same level. Its influence on policies, however, will be much greater than its strength in the 550 plus House.

According to the party: From 1998 the BJP-led government has pursued economic policies which have been disastrous for the country and for the majority of the people. These are policies which are designed to benefit the affluent 10 per cent while the rest of the people are pauperised and subject to deprivation.

The CPM proposes to pursue its own set of policies. It will increase public investment in infrastructure; review power and telecom policies; provide adequate outlays for power communications, railways and road development; strengthen the public sector in the core and strategic areas by injecting fresh capital and technology. The manifesto says that foreign capital will be channeled in areas with clear-cut priorities that will be determined in accordance with the needs for development.

The party also promises to protect domestic industry from indiscriminate lowering of import duties and take over of existing Indian companies by foreign companies. As far as the financial sector is concerned, the CPM promises to strengthen LIC and GIC as part of the public sector in the insurance field. It also pledges to bar entry of foreign companies in the financial sector. It will also halt the trend of privatisation of banks.

As far as taxation is concerned, the CPM promises to raise tax rates for the affluent sections of society and ensure strict compliance of corporate tax, wealth tax and income tax. It also promises to curb wasteful expenditure and growing misuse of public money by the officialdom and public servants. And, most importantly, the CPM promises to safeguard the right to organise, collective bargaining and the right to strike for all workers, including government employees, by legislation to be adopted by Parliament.

A hung Parliament, going by the rhetoric of the manifestos of smaller parties that may play a critical role in government formation, will not facilitate but frustrate economic reforms. The capital markets have already expressed their concern and economist pundits may be forced to rethink about growth projections.

Much, however, would depend upon the results of the general elections for the 14th Lok Sabha, which will be out on May 13.