In search of good governance

It has been an eventful fortnight, a range of issues attracting international attention. The survey published by the International Finance Corporation categorised India as a difficult place to do business, more so even than Bangladesh and Pakistan. The report finds land purchase, tax registration formalities and other statutory approvals take a very long time. Within a few days, the Human Development Report was published by the United Nations, ranking India among the lowest 20% in social development indicators.

Two major operators, Changi Airport Authority and Hochtief, pulled out of the bidding for privatisation of Delhi and Mumbai airports towards the end, saying the conditions were unfairly onerous on the international partners. They felt the $80-million performance guarantee from the international partner was putting a burden not commensurate with their responsibility in the consortium.

The most interesting events were in the financial markets. As these rose day after day, the finance minister and the regulator claimed there was no scam. Then, on Wednesday last week, a senior ministry official flew to Mumbai to discuss with the regulators and, simultaneously, income tax raids were launched against brokers in Gujarat. On the same day, there were investor meets in New York, with all the powerful in finance inviting the world to invest in India. The very next day, the government announced the tax raids had been called off and institutions were ready to step into the market to prevent it going down. At the same time, the regulator launched inquiries into trading in penny stocks, and the RBI into NBFCs. The finance minister reiterated from the US that all was well with the markets. Luckily, it became Friday by then, giving an intermission to enable the nation to catch its breath in this bewildering drama. We have never seen so much frenetic ?economic activity? in a fortnight.

?Inept? was the word on everybody?s lips. The macroeconomists (this newspaper group in particular), shouted ?grow up: allow the markets to function,? while media, the Left and perhaps even higher-ups wanted some intervention. To those participating in the market, the sequence of events was quite clear. First, there were substantial FII flows, backed by participatory notes, whose source could well be, at least in part, the recent large external borrowings of Indian corporates. Second, considerable leveraging by individuals, institutions and brokerage houses through borrowings from NBFCs and banks. Third, some brokerage houses, particularly in Delhi, and to a lesser extent in Mumbai, were advancing the margin funds (through captive NBFCs) required to take positions to major investors and brokers. And finally, the drive up of penny stocks was a combination of taking advantage of the capital taxation regime and to sail very close to the wind to rake in some profits.

The concern is not so much about the events themselves, but that they reveal lack of clarity in decision-making. Does the regulator want participatory notes or not? If yes, then let him say the origin of funds is not a concern and these are adding value in the economy. And, if he does not, he should gradually stop these and gradually coast down these exposures. Similarly, is NBFC lending to be allowed or not, and if so, in what measure? The RBI could easily decide this transparently and the market swings will reflect availability of this liquidity. Why raid brokers in Ahmedabad, when it is the source of margin money being pumped into the markets from Delhi and Mumbai that should be the source of worry?

Most important, why has the nation not seen any evidence of regulatory action? Surely it should be easy for the regulator to investigate sharp rises in unknown scrips from the point of view of the balance sheets and profitability of the company? It should be equally easy for the financial regulator to examine the NBFCs for wrongdoings, if any. The worry is, amidst all the rumours, there are none that the regulators are doing their job. The record of Sebi, that all its major decisions have been overturned on appeal by the Sat, must surely worry the common man investing in the market. Turning back to the airports, a condition considered so onerous to be impracticable to enforce; is it necessary to have it in the first place?

There are two Indias, even in the market place. One populated by young wizards, the corporate strategists with modeling computers and mathematics as their tools, who swing with the rest of the world and decide in nanoseconds. The other is the slow, ponderous government machinery, unsure of fundamentals of contract law, international markets and financial intermediation, tentatively leading its political masters through a haze of phenomena it does not understand, lacking the professional knowledge to cope with demands of the modern market and market-based economics. The macroeconomist theorist and the generalist administrator are important for policy, but knowledgeable professionals are required to man professional jobs. One has only to look at examples like Amul, ONGC, National Stock Depository and NSE-like organisations to find the fit between professionalism and corporate performance. A pity it is lacking in so many other places.

Clarity in objectives, strategy and action are hallmarks of good governance. If, after 50 years of Independence, we are still considering tentative initiatives in employment generation, irrigation and watershed development, then perhaps the development administrators do not have solutions to national problems. And perhaps that is why human development indicators are so poor.

The writer is a former finance secretary and economic adviser to the PM