Nervous over the next four years

This column would take a break from its usual contemplation of global affairs and train the spotlight on the country where, superficially, things cannot be better. However, keener eyes and ears could detect rumblings. It is important to hear them before they develop into full-fledged economic quakes.

Much was made of the potential policy possibilities with the dream team of the Prime Minister, the finance minister and the deputy chairman of the Planning Commission. The team remains, but the dreams have vanished. They have been more than easily matched by the deadly duo of the National Advisory Council, dominated by the Congress president, and the Left parties.

The finance minister?s signature policy the last time around was to lower the tax rate. Now, it is cash withdrawal tax and fringe benefit tax. The deputy chairman of the Planning Commission is barely visible. If talk is substitute for action, this government has done very well, with its ambitious declarations on administrative reforms and infrastructure development.

With prices of petroleum products being adjusted too slowly, public sector units in that sector are hurting and not showing enough profits. There are fiscal costs, too, to this approach. The government?s energy policy seems to be a bet on the Iran-Pakistan pipeline. That is a mixed bag for India, at best. Nor has this government done much for panchayat raj institutions. This is one area with the potential to make a lasting impact at the village level. Devolution of fiscal power to the panchayats is pending for a decade. There is greater scope for accountability at the village HQ than at the district, state or federal capitals. Yet, action remains elusive.

India optimists would point to frenetic activity in civil aviation. I am not sure if more flights and quotas (necessary, to be sure) for foreign airlines and access to foreign destinations for India?s private sector airlines are but the fringe of what is needed. Captain Gopinath of Air Deccan has a better vision. He called for development of minimum infrastructure in the country?s second tier-cities. That would give a huge boost for internal tourism and Indians would understand India better, far better, especially the well-heeled class. Right now, it has little understanding of the country?s history and heritage. The resulting boom in domestic tourism would hugely boost the local infrastructure and employment.

It takes the first term for a coalition or a government to understand things. Normally, the second term would be better, as the government fully understands the politics of decision making. Some pointers are available. Rajiv Gandhi?s manifesto for the 1991 election was more radical than anything he did between 1985 and 1990. The BJP?s manifesto for the 2004 elections was bolder than what they achieved in the previous six years. It should be noted that the NDA government was pretty much moribund until 2002. Unfortunately for the country?s economy and the poor, neither got the second chance they deserved.

This government might not do much better, even if given a second chance. For, it is viciously chained by the flawed economic vision of the Congress president and the myopia of the Left parties. Hence, it is unrealistic to expect radical policy reforms to be initiated and implemented by this government, either now or in the future. The risk is that this begins to affect the private sector. Thus far, India has been running on the oxygen of the private sector that was filled up in 2003 and partially in 2004. Far from topping it up, this government has depleted it more rapidly, with its halt to privatisation, to infrastructure projects and the fringe benefit tax. With common-sense economic and fiscal policies on the PAUSE mode, it is only a matter of time before the private sector loses its animal spirits.

From this perspective, the risk over the next four years of the UPA government for Indian business confidence, private sector investment and the stock market is overwhelmingly skewed to the downside. Those who claim the private sector?s confidence would be undiminished by governmental incompetence are substituting naive optimism for logic and precedence. The Indian stock market went nowhere in the 90s, as we had a succession of non-governments. When Mr Chidambaram dared to think bold in 1997, Mr Kesri ensured it was a non-starter, when he pulled the plug on the government. Between 2000 and 2002, the stock market went only way down. The NDA government was largely clueless during that period. When Mr Vajpayee started infusing life into reforms (privatisation) and infrastructure (roads and telecom), Indian stocks began an upward journey some time in 2002. Government decisiveness spilled over into private sector confidence.

To be sure, there were external factors too. That is the point, in fact. When things go well, external factors reinforce. And this works equally in the opposite direction. If we do not change our policy trajectory in the next four years, external factors are unlikely to come to our rescue. Indeed, the external environment is fraught with danger, with the risk of deflating asset prices heralding economic stagnation over many years. Without a decisive turnaround in policy-making, the real contribution of the UPA Government would be to hand down a fiscal or economic crisis. Perhaps, that would be the one positive thing they did for India, as the Rajiv Gandhi government did, particularly between 1987 and 1989. The external crisis that developed during those three years laid the platform for later reforms. Yesterday?s reformers will have to ask themselves if this ought to be their legacy, too, for India?s economic reforms.

The writer is the founder-director of Libran Asset Management (Pte) Ltd, Singapore. These are his personal views