http://www.financialexpress.com/fe_full_story.php?content_id=60490


Over the last fortnight, events have been unfolding fast and thick in the Indian scenario and have left investors — domestic and foreign — more confused and anxious than ever before. Not surprisingly, the stock markets have continued to tank with foreign investors turning net sellers in May after a long, long time.



The main fear of investors right now is the continuation of economic reforms in the light of the new government taking over in Delhi. The Common Minimum Programme was eagerly awaited and when it came, it was so full of platitudes that it has not been taken seriously.

As far as reforms are concerned, the CMP was very common, very minimum. It talked about 7 to 8 per cent growth rate and then gives you no clue how to achieve it. As one leading FII remarked, “...if wishes were horses beggars would ride”. It talks about subsidies and reducing revenue deficit to zero in the same breath.

The CMP talked of going after the Mauritius route and sent jitters down the FII community which indulged in a fresh bout of selling. The new finance minister had to summon a press conference hurriedly and make the right noises so that the FIIs don’t panic more. While all that is the usual double-speak that has become part of political life, the actual decisions taken over the last few days makes one wonder at what pace the reforms are going.

Let me make my point clear with a few illustrations. With global prices going above the $40 per barrel mark, it is obvious to the meanest intelligence that the prices of petroleum products have to be raised substantially. For example, in the US, the price of fuel has more than doubled over the last twelve months even though this is an election year. One had thought that prices would be revised by the new government but all that we are seeing are some vague statements from the ministers concerned. Furthermore, the Communists — who have become the super authority with no responsibility — have been demanding that whatever be the economic implications, they will not support the increase in the price of diesel and kerosene.

Obviously, this is madness. The oil companies are already reeling under the burden of bearing the losses. To prevent them from bleeding further, the government may either cut duties or it may bear the losses. Either way, it is going to have a hugely negative impact on the economy.

We now come to the power sector. There is absolute mayhem in this sector with each succeeding day bringing in some more news of populism.

As soon as the new government took over in Andhra Pradesh, it announced free power for the farmers — thereby fulfilling an election pledge. This is going to put the finances of that state down further.

A couple of days later, the Maharashtra state budget was announced and that also announced free power to the farmers! Not withstanding the fact that the budget showed a huge unbridged gap!

The last straw on the camel’s back was the way the CMP dealt with the power sector. It announced the withdrawal of the date fixed for unbundling of the electricity boards. It also said that the whole law would be reviewed. The markets just panicked and there was a free fall in the price of power companies and those related to the power sector.

The criticality of the Electricity Act to the reforms process cannot be over-emphasised. Reforms in the power sector could not make any headway as long as transmission and distribution remained with the state electricity boards. These are monoliths, highly corrupt and in most cases bankrupt.

It was hoped that with the unbundling of the SEBs and the entry of private players, some sanity will come in.

As I write this, there is a total U urn and it appears as if the ‘dark ages’ of power shortages may continue unless mindsets change.

There is also a move to roll back the relaxation in foreign direct investment norms in many sectors. The decision to allow foreign investors holding up to 74 per cent stake in airports has now been changed and they will not be given a majority stake. They will get only a minority stake of a maximum of 49 per cent. This is ridiculous since running airports is a very specialised business and we need to walk the extra mile to attract foreign investors.

Over the last 12 months reforms were taking a Shatabdi Express and it appeared as if they were on their way to catch a flight. But over the last few days it is becoming clear that rather than taking a flight, reforms have got on to a wheel chair.

What is galling for many investors is that wild statements are being made about increasing investments in the economy without giving a clue as to how these investments are going to be financed. Already, there is a great likelihood of a huge gap in the resources with the highly successful public sector disinvestment programme being called off. So we need extra money just to fill that gap.

With all the populist talk of increasing subsidies, we are likely to see a bigger hole in the government’s pocket. And in this environment to talk of increasing investments just does not make sense...unless of course we see a large bout of extra taxes in the coming budget.

It does not need a crystal ball to see that reforms are being threatened by the back seat driving the Communists are doing. Reforms in India can take off only, repeat only, if we sort out the power sector, bring in changes in the labour markets, get rid of the public sector baggage and make big changes in the sectoral FDI caps. Each one of these steps is essential to achieve the 7 to 8 per cent GDP growth that the CMP flaunts. Investors do not see light at the end of the tunnel in any of these key areas. So unless the duo of PM and FM get their Pat-and-Mike roadshow going real fast, India will soon go off most peoples’ antennae.

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Sucess is not an accident it is a result of hardwork with intelligence.

I happened to read this article on FE and feel this Government is going to undo what the other one did.

The CMP program can best be depicted as "Khichdi".

You cannot have a socialist outlook and at the same time bridge the gap in your deficit. After all some one is robbing the rich to pay the poor. Everyone knows that.

I remember having read a book on Economics while doing management which stated that every step in fiscal discipline leaves an imprint elsewhere and marks a new set of directions for the country. Steps taken to curb or bring about a change in one field affect the other...
You can not do a tight rope walk when it comes to balancing the economy and boosting poulist measures..

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What goes around comes around...
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A CANADIAN INDIAN

I was in India and following the elections and new govt formations. yes I did feel that the big mistake was the Commies not joining the govt & The congress. I am no congress karyakarta nor BJP admireer but surely feel that the last govt did not do as they advertised, they built on the congress financial agenda and that too very slowly, agreed the Forex looks very impressive, but how was is accuired and how is it going to be used ( i hope its for the people at least this time) one thing for sure that it was learnt that the people can swing things, but unfortunately we can not make the govt implement the pro-people projects. but I have faith in Mr. Manmohan Singh. educated, experienced and apolitical. No country can progress if the financial base is not strong and no country can get out of poverty if the country is poor itself. so here we have to have the socialist policy with a smart balance with business ( as they said busines with a socialist face). Ambani's and tata's must realise that it's the people who are making money for them rather then the single politician. so they have to invest in the welfare of the workers and all related issues. Only in India it's possible this kind of socialist economic policy at the same time having capitalist aspirations to fund it.