Hello, Is Anyone In Charge Here?
This may not have mattered much if the macroeconomic indicators had been pointing in generally the right direction. But that doesn't quite seem to be the case, although it is early days yet to voice anything other than disquiet. For some of this disquiet at least, it is the government which is responsible. It is poking and prodding "" for example, the puny attempts to revive the stock market "" like nervous novice.
The non-strikers, meanwhile, are if anything, only making things worse. Thus:
nIn spite of valiant (and perhaps futile and costly) attempts by the State Bank of India, which has reduced its prime lending rate twice in the last two and half months, interest rates may not come down quickly enough to prevent a mild recession. Even the RBI governor who had been hopeful until mid-summer, appears to have given up. In an interview to this newspaper last month, he said he expected the rates to stay high.
nThe government's borrowing programme, mostly intended to pay of past debts, shows no signs of slackening. Indeed, such is its predicament that the borrowing programme can't slow down. The only choice is between monetising and not monetising.
nMeanwhile inflation, thanks to the round of much-postponed increases in oil prices, has gone back to just under 6 per cent and is rising. It will probably settle at around 7.5 per cent for the year as a whole "" with luck because this government could go for fiscal expansionism. There is not much point in hoping that the finance minister will prevent this. He might. But if his easy acquiescence to the setting up of six new zones after just a 45 minute debate in cabinet is any indication, he finds it impossible to resist political pressure. In fairness, though, he is under more of it than his predecessor.
nIndustrial growth rates are exhibiting the first signs of slackening and inventories seem to be building up. Nor has a fresh round of investments in infrastructure begun yet. The recent announcement to increase the FII's ceiling from 30 to 100 per cent in debt instruments will help in putting together financing but not for a couple years.
nExport growth rates are also flagging, although the commerce ministry dutifully thinks that exports will continue to increase at around 20 per cent. But again the RBI governor doesn't agree. He thinks 15-16 per cent is more like it. Imports too are slowing down, but this could be due to purely a statistical blip, thanks to a high base last year during the same period. The next three months will show.
nThe state governments, now regarded as the repositories of all virtue and wisdom in the new (but fake) spirit of federalism, were expected to step in as to take up the slack left by the Centre. But they are in no position to take up the slack. Either they are on the verge of bankruptcy or political divisions have paralysed them. The result is once again a policy vacuum contributing to that sense of drift.
Purposeful action, perhaps after the election in UP, might still arrest a further worsening. But, on a realistic assessment, the government's room for manoeuvre seems severely limited. On the one hand are its own coalition compulsions, which are preventing bold initiatives; and on the other is the legacy of the severe monetary squeeze of last year, which may have conquered inflation but, in the process, has greatly weakened the financial well being of firms.
The markets know all this, which is why they are so bearish. Efforts at propping them up, such as the ones currently in progress, look ineffectual and are probably doomed to failure. They are best avoided, if only because if persisted with they create their own vested interests. Nor, one suspects, should supposedly autonomous institutions like Sebi and the RBI be giving in to nagging from the ground floor in the finance ministry.
What can the government do to restore confidence? Three things, to begin with:
nDemonstrate that the economy is not on auto-pilot and that someone is indeed in charge, not just of the day-to-day housekeeping but, more importantly, of charting out a fresh course. This calls for skill which, luckily, is still available in the finance ministry. Indeed, if there was a distinctive feature of the Manmohan Singh years, it was the ability to give an impression of constant activity. Even when the government was doing very little, as during 1993-96, there were enough atmospherics to suggest that a great deal was happening. The sense of perpetual action was conveyed mostly by generating lots of ideas about reform. Not a week went by without some new idea being floated, some old idea being implemented, if only in part. There was a sense of vigour which was sufficient to keep up the illusion of enormous change and, thereby, business confidence.
nBut because of this sort of thing cannot be kept up indefinitely, there is need to go beyond play-acting. Manmohan Singh, as an experienced player, was able to provide just the right amount of minimalist change to keep spirits from flagging. He had made this a fine art. The United Front government can't expect to get away with this. It needs a major initiative. Just one major structural reform between now and December will be enough to boost confidence, by sending out a clear and unmistakable signal that the government hasn't gone to sleep on the job. The best place to begin is basic telecoms services, although some would argue for liberalising the insurance industry. But insurance liberalisation is linked to other things while telecoms has the merit of being important as also highly visible. Besides, telecoms liberalisation is stuck in a mire right now, thanks to Sukh Ram. A determined bid to pull it out will help enormously.
nThird, the finance ministry needs to begin privatisation, even if only of PSUs like Modern Bread, in right earnest. The idea must be to show, in equal proportions, that not only is it implementing its own common minimum programme but also making a serious attempt to retire debt, the servicing of which is leading the country straight into an internal debt trap. Over half of new government borrowing is going to pay for past debts and the proportion is increasing.
Mr P Chidambaram has been content so far with quick singles. The time has come for him to open out his shoulders a bit. If he clicks, like Kaluwitharana he will carry the day. If he doesn't, well, at least he would have tried.