One of the most important ideas in economics of the last century that we owe to John Maynard Keynes is that expectations play a central role in shaping the animal spirits of enterprise and decisions about investment and consumption by households and firms. Expectations are often shaped more by sentiment than by hard facts. Herd mentality, a phenomenon with which investors are all too familiar, is nothing more than shared sentiment, but it has tangible consequences for the economy. The sentiment in and on India at the moment is more bearish than bullish, and is being shaped by the view that in the realm of economic policy the Union government is rudderless and leaderless. It is, therefore, reassuring that Finance Minister Pranab Mukherjee chose to take the bull by the horns and respond to such a perception by engaging financial journalists.

The tangible intangibles

Business Standard

There are a lot of similarities in the 2011-12 first-quarter results of the two software leaders, Tata Consultancy Services (TCS) and Infosys. Both have grown their topline at a slower pace than in the previous sequential quarter. The bottomlines of both have actually dipped, again sequentially, leading to a fall in net margins.

First-quarter blues

Twenty years ago on this day, 24th July 1991, India&rsquo;s finance minister Manmohan Singh wound up his historic Union budget speech with the famous words: &ldquo;No power on earth can stop an idea whose time has come. I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea.

Strategic dimension to 1991

The Union minister for petroleum and natural gas, Jaipal Reddy, is an unlikely candidate for &ldquo;reformer of the year&rdquo; title, but on the 20th anniversary of Prime Minister Manmohan Singh&rsquo;s pro-liberalisation initiatives of July 24, 1991, it was this diehard Congressman who revived the liberalisation spirit and chose to march ahead in a government that keeps looking right and left but shies away from crossing the road. First came the decision to raise petroleum prices, including the prices of kerosene and liquefied petroleum gas; then came the final breaking of the Cairn-Vedanta logjam; and now the clearance for the Reliance-British Petroleum deal. Mr Reddy would have made his prime minister proud with his pragmatic liberalism. He has shown how a proactive and self-assured politician can make a difference to a moribund ministry.

Anniversary spirit

The recently announced government policy on defence equipment procurement, clearly intended to jump-start the indigenous defence industry, comes not a day too soon. Much of what appears in the new policy was first mooted six years ago by a committee chaired by Vijay Kelkar. The benefits of such indigenisation extend beyond reducing the country&rsquo;s reliance on imports. Defence production can have economy-wide synergies, particularly with the manufacturing sector. India&rsquo;s reliance on defence equipment imports at over 70 per cent of total procurement is unacceptably high. To be sure, there are a few indigenous success stories, notably in metallurgy and special materials (the Chobham armour on the Arjun tank and the composites used in light combat aircraft are world-class), radars and embedded software used to design the mission computer used in frontline aircraft, but wide-ranging success has been largely elusive.

Defence and development

Diplomacy attaches great significance to words. While words are no substitute for deeds in international relations and what you do is more important than what you say, there are times when what is said can be significant if it presages what is likely to be done. Beat reporters may have been disappointed by United States Secretary of State Hillary Clinton&rsquo;s visit because it did not produce any headlines about deals and deeds, but foreign policy analysts will pay greater attention to Ms Clinton&rsquo;s words, especially her speech in Chennai. This is the first time a Democratic Party politician has laid out the wider canvas within which the US sees its relations with India.

Hillary Curzon

The embarrassment of riches in grain stocks confronting the government is a problem of its own making. It is the product of ill-conceived policies on grain procurement, storage and distribution and mistimed decisions on opening and shutting of foodgrain exports. The grain stocks that have piled up as a consequence are far more than needed for any rational inventory and public distribution programme. Burgeoning food stocks pose problems of storage and wastage.

Poor economics

There were several reasons why few expected the Reserve Bank of India (RBI) to take youthful strides rather than baby steps this week. Few expected an increase of 50 basis points (bps) in the policy repo rate. Ignoring the purely ideological, rate-hike sceptics fall into two categories &mdash; those who believe that protecting growth and corporate bottomlines is more important than curbing inflation and those who believe that monetary policy may have reached its limits and only action on the supply side can break inflationary expectations. To be sure, RBI itself has admitted that there are limits to what it can do and that the government must do more. As RBI Governor Duvvuri Subbarao put it ever so politely, &ldquo;The Reserve Bank&rsquo;s efforts of achieving low and stable inflation could also be supported by concerted policy actions and resource allocations to address domestic supply bottlenecks, particularly in respect of food and infrastructure.

No pain, no gain

Has the Bt gene-driven cotton revolution, which transformed India from a net importer of cotton into the world&rsquo;s second-largest producer and exporter of this natural fibre, run out of steam? Some analysts tend to believe so, given that the overall production and productivity of cotton have stagnated in the past five years. However, their analysis and the conclusions being drawn from it are not wholly indisputable. For sure, the output numbers used by the analysts do not tally with the Union agriculture ministry&rsquo;s official estimates. Even if, for the sake of argument, it is assumed that the output has remained static or that growth has decelerated, it would still be far-fetched to attribute this to any decline in the efficacy of Bt technology. The gene derived from the common soil bacterium Bacillus thuringiensis (Bt gene) and infused into cotton hybrids is not a yield enhancer but merely an insect killer.

Cottoning on

Reliance Industries, which has suffered technical and regulatory setbacks recently, has nevertheless managed to turn in satisfactory results for the first quarter of 2011-12. A 17 per cent rise in year-on-year net profit has met analysts&rsquo; expectations. But there is a mixed story behind this overall bottomline.

The certainty of uncertainty

It is easy to be critical of the idea of imposing a nine-year ceiling on the tenure of independent directors under Clause 49 of the Listing Agreement governing all publicly-held companies. There is the obvious question of the need for any cap on the tenure of independent directors.

Unhealthy dependence

Successive drafts of the food security Bill seem to agree on one thing: a greater role for the Food Corporation of India (FCI). FCI buys grains at the minimum support price and distributes them through fair price shops and other food-related schemes like midday meals in schools and children&rsquo;s nutrition as part of the Integrated Child Development Services. Since its distribution price is lower than its buying price, FCI survives entirely on subsidies. Year after year, FCI budget estimate falls short of what is required. The situation has been aggravated by a bumper harvest this year. This means FCI has to buy more grains since an increasing number of farmers will provide their produce to the government at the minimum support price owing to a downward pressure on market prices. Add to this the fact that the government has announced a bonus on the price to wheat farmers.

Law vs governance

The central leadership of the Bharatiya Janata Party (BJP) is unlikely to gain any political mileage out of its decision to seek the resignation of the Karnataka chief minister, B S Yeddyurappa, in response to his indictment by the Karnataka Lokayukta. The response of the head of the first BJP government in the south to the diktat of his party&rsquo;s leadership to fall in line with the rules of probity and correct form can be likened to the caricature of a neta shouting and screaming protestations while being dragged out of his chair and physically taken out of his office by law enforcers. The BJP&rsquo;s ability to project itself as a cleaner alternative to the UPA government, under attack on corruption, will be severely impaired by popular realisation that not only is it tainted where it is a political force to reckon with, but its ability to impose a minimum level of discipline is severely impaired by its most prominent members&rsquo; desire to stick to power, come what may.

BJP's comeuppance

Complex pricing of energy always causes a cascading set of problems. Consider the recent decision taken by the United Progressive Alliance government to allow oil marketing companies the freedom to alter diesel prices at the pump in small doses. The idea is to eventually wipe out under-recoveries â€” losses on each litre of diesel sold â€” which eventually find their way into the governmentâ€™s accounts and push up the fiscal deficit, already unsustainably high.

Keeping it simple

The decision of the US Senate not to ratify the American Clean Energy and Security (ACES) Act, 2009, passed last year by the US House of Representatives in the run up to the Copenhagen Climate Summit, is a reminder of the evaporating support for tough measures to deal with climate change and carbon emissions in developed economies.

The changing climate

Britain&rsquo;s Prime Minister David Cameron knows a thing or two about public relations. Even so, his carefully crafted visit to India, with senior Cabinet ministers meeting a wide range of policy- and opinion-makers and business leaders in New Delhi, Mumbai and Bangalore, should be deemed a success. It has helped take the bilateral relationship back to the template first created by another Conservative Party prime minister, the unfairly under-rated John Major. It was Mr Major who first altered the metaphor in this complex bilateral relationship between a former colony, &ldquo;the jewel in the crown&rdquo;, now an &ldquo;emerging market&rdquo;, and a former global power by launching what was called the Indo-British Partnership Initiative (IBPI). The idea of &ldquo;partnership&rdquo; was new to the bilateral discourse, though that is precisely what India&rsquo;s first prime minister Jawaharlal Nehru had envisioned for the relationship.

Flag follows business

With the Supreme Court considering a petition filed by the Central Electricity Regulatory Commission (CERC) on whether the Tamil Nadu government has the right to prevent electricity suppliers within the state from selling power outside the state under Section 11 of the Electricity Act, it is obvious the situation is quite serious. Last year, states like Karnataka, Andhra Pradesh and Tamil Nadu used this provision to prevent sales outside the state. Orissa, which allows such sales, insists that all private generators sell only to the state-owned Gridco &mdash; Gridco then sells this to other states at a much higher price, pockets the difference and this is used to subsidise power sales within the state. What is happening in Delhi is different in specifics &mdash; it hurts consumers while the others hurt power companies &mdash; but the broad tendency is the same, of state governments consciously violating the letter or spirit of the Electricity Act.

Electrifying situation

After failing to come anywhere near the 10th Five Year Plan (2002-07) target of 4 per cent per annum rate of growth of agricultural output, the Planning Commission has projected a lower target growth rate of 3 to 3.5 per cent per annum for the 11th Plan period. While some may view this as a more modest target, others may consider it as still far too ambitious, given the track record of the 10th Plan period, when the actual figure was around 2.3 per cent, with the comparable number for the decade 1995-2005 being 2 per cent. What is, however, worrying is that this lower target rate of growth is, in fact, below the 3.62 per cent per annum growth rate recorded in the decade 1985-95. Moreover, given the anticipated overall GDP growth of over 8 per cent, the poor acceleration in the farm sector that still supports nearly 65 per cent of the population is an indictment of the strategy of &ldquo;inclusive growth&rdquo;.

Waiting for second revolution

A long-standing former chief editor and publisher of one of India&rsquo;s largest newspapers, Malayala Manorama, a former president of the Indian Newspaper Society, former chairman of Press Trust of India, founder-trustee and chairman of the Press Institute of India and Research Institute for Newspaper Development, a member of the executive committee of the Federation of International Newspaper Publishers and Editors based in France and a consultant of the International Press Institute. The late K M Mathew occupied many important positions in the world of Indian journalism. However, he will always be remembered as the most respected and successful journalist and publisher in India&rsquo;s most literate state, Kerala. Passing away over the weekend at his home in Kerala at the ripe age of 93, the late K M Mathew has left behind a media empire that spans the world of print and electronic media &mdash; newspapers, magazines, internet editions, television channels and the works.

A very Indian publisher

If any proof was required that industry was slowing &mdash; standard year-on-year numbers show a healthy 11.5 per cent growth but the seasonally adjusted numbers show a sharp decline in growth &mdash; the first quarter results provide ample evidence.

Bull takes a breather

The initial public offer (IPO) by SKS Microfinance has catapulted the sector into the limelight, bringing lending very small amounts to very poor people right into the financial mainstream. This is a matter for rejoicing. If hardnosed risk capital can support such lending, then a major weapon will have been found to fight poverty. But Muhammad Yunus, father of microfinance, is not happy. His concern is that when you go for an IPO &ldquo;you are promising your investors that there is a lot of money to be made and that is a wrong message&rdquo;. His sense is that &ldquo;poor people should not be shown as an opportunity to make money out of&rdquo;. He would have been happy if investors were told upfront that this was a social business from which they should not expect any returns. On the other hand, SKS founder Vikram Akula has emphasised that it is the prospects of high and assured returns which will bring funding to the sector whose needs are gigantic.

Keep microfinance healthy

Incisive columns and editorial comment by top opinion leaders

Page 537 - Editorial Comment