February 22, 2020
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Who Gives A Damn For The Indian Economy?

Frequent elections are bad. But some prefer to focus on the glimmers of hope beyond the gloom.

Who Gives A Damn For The Indian Economy?

1998. As a month- old prime minister, Atal Behari Vajpayee addresses the CII annual session. Industrialists, unsure of the emerging colour of the government, listen with barely- suppressed boredom. Among other things, Vajpayee unveils a 10- point action plan, promises project clearances in 100 days, yet applause is muted.

1999. Oblivious of his caretaker position, prime minister Vajpayee charges up the CII annual conference on "The next millennium" with an agenda for the second phase of reforms. In between, he also whips up emotion in all- too- willing businessmen over petty power games eroding India’s image abroad. As he ends with the promise of addressing the CII ’s session for the third time, in the millennium year, the periodic bursts of applause are replaced by a standing ovation.

IF Vajpayee succeeded in extracting the last bit of sympathy out of the illustrious gathering at the annual jamboree of the Confederation of Indian Industry (CII), it had less to do with his image as a reformer. For businessmen visibly nettled at the prospect of having to face the dual evil of the third general elections in four years along with a government in limbo for the next four or five months, it was more an overwhelming vote against continuing political uncertainty. "The sooner the caretaker government is eliminated, the faster we can proceed with the unfinished economic agenda," says CII president Rahul Bajaj.

Finally, those who largely fund elections are keen to have a say in its execution. "Indian elections are largely a privately- funded affair," says Subir Gokarn, chief economist, National Council of Applied Economic Reserach ( NCAER ). A fact that is confirmed by Neeraj Jain, who owns and runs a readymade garment- making unit in Mumbai. "I know what the retailers will tell me now," he rues. "‘ Neeraj bhai, elections have arrived. Every single party and their candidates will be demanding donations. I’ll pay you after we’re done with these politicians.’"

And donations, as businessmen will readily vouchsafe, are not the only way of tightening the screws. In his usual candid style, Bajaj told the CII gathering how frequent elections were making business costlier. One, by making palm- greasing an annual affair instead of a five- yearly one earlier. Two, by shifting the palms around. Three, with priorities changing with every government, even palm- greasing was proving ineffective.

Of course, a higher outgo on bribes is the least important cost of  non- governance. This time, the total cost will multiply if India creates another political record by allowing a government which has technically lost the people’s mandate— even if by one vote— to run the country for four or five more months. Inder Kumar Gujral did run the country for three months as caretaker, as did Chaudhary Charan Singh. But they did little of import. During Charan Singh’s time, especially, the economy was under a relatively stable policy framework. Today, with reforms losing steam since the mid- ’90s and a surge in consumer and industrial demand remaining elusive for a long time, a lameduck government for a long period of time can just become the last nail in the coffin of India’s ill- fated tryst with liberalisation.

What’s wrong with a lameduck?

But there are contrarians to this view. Economist and chairman of Oxus Fund management, Surjit Bhalla dismisses the hullabaloo over political instability which he thinks is actually good for economic reforms. Says he: "Lack of political dominance means that politicians in power will make that extra reform in order to fight for marginal votes in a future election." And, as Gokarn says, "with the cost of one vote becoming so high as to equal the fall of a government", the responsibility becomes that much greater. Bhalla furnishes at least six pieces of evidence to prove that political instability equals economic reforms. Despite assuming power with 415 seats, Rajiv Gandhi did little for reforms. It was the minority government of P. V. Narasimha Rao that kicked off the historical reforms process in India in ’91. Yet, when the Rao regime became comfortable with power, the pace slackened.

Similarly, both the United Front governments over 1996- 97 were responsible for major decisions like direct tax reform and oil sector deregulation. Even with the BJP government, there is a world of difference between pre- and post- November 1998 governance. It took a big electoral setback for the BJP to realise the economic writing on the wall and act accordingly. Says Bhalla: "When the history of BJP rule is written, it is likely that 1998 will be remembered as the beginning of its incarnation as a liberal, reform party."

Industrialists are generally agreed that the last six months of the BJP government had seen a spate of high- voltage policy decisions culminating in an above- average budget that really seems capable of delivering the goods. Holding elections late would mean a spanner in the working of that budget. In spite of assurances from Vajpayee as well as finance minister Sinha on putting the Finance Bill into effect immediately, the next few months might see only routine administrative stuff going through.

What can a lameduck do? That’s because the exact legal position of a caretaker government, a term which gained currency only with the Charan Singh government, is very grey. Says former law minister and Constitution expert Shanti Bhushan: "Article 74 of the Constitution makes no distinction between a caretaker government and any other elected government. In fact, it recognises only one council of ministers. So, technically, this government is empowered to take any policy decisions  it wants to. Only that now it has to go through the President. It can send its recommendations to the President, which the President can send back for reconsideration only once." While this government can take even significant policy decisions through ordinances, it is unlikely to do so due to what Bhushan describes as "self- imposed limitations". Few governments want to take flak for corruption or become accountable to the electorate through such decisions. However, according to a note from the Cabinet Secretary, the Vajpayee government cannot allow any major investment policy matters, nor place or accept tenders nor do anything out of the ordinary. Most importantly, with Parliament dissolved, it can hardly pass new legislations or legislative changes relating to the economy.

Goodbye to lawmaking... Says Y. C. Deveshwar, chairman, ITC : "Just by talking about market economy, reforms do not take place. Market institutions still have to be perfected and that’s an ongoing process. Repeated elections stall that process." And the most important element of that process is law-making. Adds Gokarn of NCAER: "The biggest cost of the current instability is the lack of pushing through new legislations. The speed with which it did so was one of the most significant achievements of this government.That momentum is now lost and even after a new government comes, it will be quite a while before that pace is matched." The total number of Bills currently pending before the Lok Sabha is over 100. Among them, 50-odd relate to business. Of immediate importance are seven Bills relat-ing to insurance liberalisation, foreign exchange management and amendments to the Companies Act. These Bills have lapsed and will now have to be reintroduced by the 13th Lok Sabha.

That’s really yet another milestone in the chequered career of some of these pieces of legislation. For instance, insurance liberalisation has been pending since 1994. So are FEMA and the Plant Varieties and Bio-diversities   Bill. The Patents Amend-ment Bill has been hanging fire since 1995 and the shape of the Trade Marks Bill as it stands now is not markedly different from the 1993 draft. Even otherwise, instability is not conducive to lawmaking. According to a study by Anoop Pujari over 1990-97, our parliamentarians have rarely concerned themselves with creative lawmaking. Even when they have, the number of legislations enacted show a sharp decline whenever there has been a change of government. Experts agree that unless legal and administrative reforms are in place, the second stage of reforms cannot begin to be adopted. Also, many of  the first-stage reforms are hindered by the lack of changes in the administrative setup and an outdated legal system. 

And all other important policymaking:

Even in terms of policy decisions, the country loses a lot of time if Chief Election Commissioner M.S. Gill sticks to his stand of holding elections in September. For one, India loses out on its commitments to the WTO. As it is, the US has not agreed to India’s defence on the import tariff regime. It still maintains that India’s rates are too high compared to its forex reserves position and India has lost its case in the WTO. However, the US has still not taken any action and is believed to be waiting for a clearer political situation to emerge. "At the end of this year, many legislative changes fall due for which we had been given time for five years. As for the Patents Act and exclusive marketing rights provision, there is every possibility that we have violated the WTO provisions," says Bibek Debroy, director, Rajiv Gandhi Foundation (RGF). And what about the government itself? True, the budget is law, but will it work now? Especially when a budget that aims at tightly controlling revenue expenditure in 1999-2000 will actually  have to deal with an untoward revenue expenditure of Rs 900 crore towards the cost of holding elections? A budget that expects a moderate rise in tax receipts, in an election year where incomes are expected to rise more in the informal sector— out of the tax net— than in the formal sector? Especially after tax realisations have been so badly off target in the last fiscal year? What happens to the ambitious Rs 10,000 crore to be raised through disinvestment? Surely a caretaker government cannot be allowed to hive off public sector shares? What credibility does it have to lure buyers?

The other spanner in the disinvestment works is of course, the capital market, which has been down in the dumps since the government fell. Stockmarkets don’t react well to instability, especially the still highly speculative Indian stockmarkets, where the opportunity for profiting from disasters are great. Already, stocks have been hammered down to very low levels which may reach a new record once the date of elections is declared for September. Quick to spot an easy bargain, FIIs have pumped in Rs 850 crore in seven days since the government fell.

Polls are good for the markets: But that should not be a dampener, says Bhalla of Oxus. "The current uncertainty will affect only about 25 per cent of the economy— industry, in the sense that infrastructure projects will get delayed or insurance privati-sation will have to wait. The only people to lose will be the bureaucrats and politicians, who won’t get their cuts. The fact is that the underlying economy is good and profits respond to underlying fundamentals. I see the rupee being stable, a rally in the stockmarkets and a Sensex level of 4,000 at the end of the year." Adds Hemendra Kothari, chairman of fund manager DSP Merrill Lynch: "Even though the prices have dipped, the fundamentals haven’t changed. This makes it an ideal opportunity for those who missed buying at pre-budget prices. Till this political uncertainty ends, the market will remain in the trading zone."

Can the elections actually benefit the economy? Says N C A E R’s Gokarn: "Since the state is not funding elections, the cost is not that high. There is the multiplier effect of job and demand generation." Explains Bhalla: "Elections benefit the economy as black money moves out from under the mattress. Polls are a legitimately expansionary fiscal policy. Hindustan Levers will not sell fewer soaps because of political uncertainty, it might even sell more. On the other hand, a lot of labour will find temporary employment— more posters to be printed, more ballot boxes, more sale of two-wheelers, cars, jeeps, more eatables." Consider such beneficiaries to all the 543 constituencies and there could be millions who would end up much more prosperous with frequent elections. In fact, Kothari goes a step further. Says he: "The stockmarkets have always perf o rmed exceedingly well a year after elections. A year after the ’84 elections, the markets grew by 29 per cent. In ’92, it was 126 per cent. Only in ’97 was the growth flat. So I’m quite bullish about the markets." Adds a BSE broker: "During elections, we tend to see a unique phenomenon of what is known as reverse  hawala, where a lot of money parked abroad starts coming in through the hawala operators."

There are counter-arguments too. Elections make industry hold on to their decision on investment and the affluent consumer defer their spending decisions. Hyundai is already reported to have shelved a $1 billion investment plan and the cost of power projects now stuck will top thousands of crores. Elections also fuel price rises, thanks to too much money floating around in the system,  and create artificial demand and supply situations and short-ages/ overflows to match the situation. Much of the income rises happen in the fringe areas outside the formal, registered economy. As a result, much of the black money spent could just get recycled as black income. But the net gain for an overly rural economy like India’s can only be positive.

Minimum Economic Agenda: But all that can happen only if the elections take place soon. Else, the economy will continue to blunder along. Still, business remains hopeful that with an emerging consensus among all political parties on some important issues, the economy still has the chance of breathing easy. C C I has already prepared a paper on a possible minimum economic agenda, which it hopes to release this week. On insurance, for instance, says the R G F’s Debro y, who helped draft the agenda, except for the ratio of foreign holding, there is a complete consensus among all political parties, irrespective of their colour.A similar  situation exists on patents, F E M A, even on privatisation.

Can this consensus succeed in insulating the economy from recurrent political instability? Says Jamshyd Godrej, managing director, Godrej & Boyce: "Industry cannot exist in a vacuum. You need the umbrella of political stability. Only then can industry move forward." That may be the extreme viewpoint of a protection - hungry industry, but experts do agree that more reforms reneeded before a separation of state and industry can happen. Says Bhaskar Dutta, professor, Indian Statistical Institute: "There is a convergence of ideas on re f o rms among political parties. But the less the scope of government intervention and controls in anconomy, the more insulated it will be from political turmoil." In politically-volatile Italy, economic activity is more determined by and dependent on the markets and other institutions which allows for a smoother economic functioning. Dutta, who has studied state govern-ment performances to conclude that populist decisions have a direct correlation with unstable coalition gove rnments, feels that such an insulation would be difficult in India, which is far from putting in place a facilitating institutional framework and where the state is still the mother of all policymaking.

A more pragmatic approach would be to discount political instability. Says Gokarn: "The trouble is, we’ re benchmarking political stability with the old one-party system. We’ll never return to  the good old raj of Mrs Gandhi as some people tend to think, in the same way as the old yearn for the British Raj. Our political five-year system is no longer consistent with the decision-making system. But then we’re making a mistake by confusing political evolution for instability, and evolution is an n h e rently unstable process." Indeed, the economy can live and earn. And the sooner elections are held, the faster the learning  process. The B J P government’s fast-paced transition from saffron flag-waving to economic maturity is the biggest proof of that.

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