Politicians and bureaucrats need to take special lessons on managing expectations in a modern economy where there are as many global participants as local. Just take the slew of announcements made on Monday to induce greater capital inflows. Relaxing limits for FII investment in government bonds, making available a larger quantum of foreign loans to corporates and promising to soon notify the reduced withholding tax on interest payment on foreign borrowings were all steps in the right direction, which could bring in up to $20 billion of fresh capital from abroad in the next few weeks.
Yet, the rupee did not react positively after RBI/finance ministry made the set of announcements relaxing capital inflows. Immediately after these policy measures were unveiled, the rupee declined to breach the R57 to a dollar level. Why did this happen when the policy announcements were decidedly positive for inward capital flows? Probably because the market?s expectations had been raised quite a bit by finance minister Pranab Mukherjee and Prime Minister Manmohan Singh, both of whom had declared over the weekend that some package of measures was coming to give both the rupee and the economy a booster dose. Evidently, the announcements fell short of expectations. This is really about managing expectations. When both the FM and the PM talk about a package, the market begins to expect more than mere relaxation in the existing limits for FII investment in government bonds or for corporates raising foreign loans, which by themselves were very important for the rupee and the market. I can bet my last penny that the rupee would not have declined and, in fact, may have strengthened had the FM and PM not spoken about Monday?s announcements over the weekend.
The moment the government spoke of ?a package of measures?, much of Sunday was spent by market players in trying to figure out what the package might be. Would it be just about the declining rupee or could it also have something to do with reining in the fiscal deficit in the medium term as promised in the Budget? This is where the expectations got heightened. When Pranab Mukherjee spoke of the package, the market still seemed to think it would be just some incremental measures aimed at addressing the rupee. However, the PM?s intervention actually created the expectation that it could be something bigger because the PM is not known to speak even in normal times. But things have obviously changed as the PM will soon speak a lot more directly on the activities of the finance ministry in the weeks ahead. So the market is already building a new level of expectations from Manmohan Singh. The PM and his team must be mindful that these expectations are not belied in the next few months. The market has started believing that the next few months are the only opportunity for a beleaguered government to do some of the things promised in the Budget, such as diesel price hikes and measures to rein in other subsidies.
After Monday?s package got announced, Montek Singh Ahluwalia also stoked expectations by suggesting that the PM will unveil a lot more in the weeks ahead. Obviously, this flurry of activity and expectations is linked to Pranab Mukherjee formally moving to Rashtrapati Bhavan by end-July and the North Block getting a new occupant.
Frankly, I am a bit wary of the massive expectations build-up in the run-up to the finance ministry coming under the close watch of the PM himself. Since the actual transition will happen only end-July, there is too much speculation, which is growing by the day, as to what the PM might do after he takes charge of the finance ministry temporarily before formally handing it over to someone else. There is speculation that retrospective taxes may not be implemented, many of the Budget proposals which gave the taxman undue discretionary powers may be withdrawn, and the government will bite the bullet on some of the promised reduction in subsidies. While a detached Pranab Mukherjee would watch this drama play out from his Rashtrapati Bhavan perch, it will be a real test for Manmohan Singh whose ?economist credentials? have taken a beating over the last year, with sharply falling GDP and stubbornly high inflation.
This is the big chance for the political-economist Manmohan Singh to do what he might have wanted to do all these months but could not because he had a certain ?relationship constraint? with Pranab Mukherjee. Since Pranab Mukherjee is far more senior to Manmohan Singh in the party hierarchy, the PM would largely refrain from disagreeing with the FM directly. Communication on critical matters would often go via the Congress Party president. Of course, in such complicated arrangements, things would also get lost in transmission! It is an open secret that Manmohan Singh was totally opposed to the manner in which retrospective taxation was sought to be implemented. Finally, Pranab Mukherjee did make a statement in Parliament at the end of the Budget session that no tax file, if already closed before April 2012, will be reopened. It is not so well known that Sonia Gandhi had put her weight behind that one.
Of course, this circuitous route can now be avoided totally as the PM would just have to discuss matters with the Congress president and implement some critical reforms. Therefore, expectations of PM Manmohan Singh are suddenly soaring. This has to be managed properly, to say the least.
mk.venu@expressindia.com