The fact that the Union government has been weakened after the assembly elections is but only one of the many factors which are responsible for the slowing-down of two ongoing economic processes.
The Atal Behari Vajpayee government has become weaker in the wake of theassembly elections to Tamil Nadu, West Bengal, Kerala and Assam. In each ofthese four states, the ruling Bharatiya Janata Party (BJP) was at best amarginal player. However, after the elections, the BJP has become even moremarginalised in these states of eastern and southern India.
While the outcome of the elections would not have a direct or an immediateimpact on the stability of the National Democratic Alliance (NDA)government, what cannot be denied is the fact that the largest oppositionparty, the Indian National Congress, has emerged much stronger.Consequently, supporters of the NDA government have become a trifle lesssanguine about its ability to last the full course of its five-year term.Though government spokespersons will not admit it publicly, their comfortlevel has definitely decreased.
Will this development strengthen the Vajpayee regime's determination to pushthrough economic reforms at a faster pace, as the government's supportersbravely contend? On the contrary, there is a distinct possibility that thespeed at which policies of economic liberalisation were being pursued wouldslacken. The fact that the Union government has been weakened after theassembly elections is but only one of the many factors which are responsiblefor the slowing-down of two ongoing economic processes. The first process isthe opening up of the Indian economy to the rest of the world while thesecond relates to the revamping of ailing public sector undertakings andprivatisation of government-owned corporations. On both these contentiousissues, the political consensus has been breaking down over a period of time.
Before one looks at the various reasons responsible for this lack ofconsensus, let us first consider the views of those who argue that the Uniongovernment's resolve to push ahead with its programme of economic reformshas not been - and will not be - adversely affected. On the evening of 9May, the day before voting to the state assemblies was to commence, theCabinet Committee on Economic Affairs virtually opened the floodgates toforeign direct investment (FDI) in a number of sectors. It was announcedthat 100 per cent FDI flows would be allowed in a range of industries suchas drugs and pharmaceuticals, airports, hotels and tourism, mass rapidtransport systems, development of townships and courier services.
More importantly, the Cabinet announced that 26 per cent foreign equitywould be allowed in companies engaged in producing goods for the defenceservices. This hitherto "sensitive" sector has been opened up toprivatedomestic firms. Foreign companies have further been allowed to hold 49 percent of the equity capital in banks and 74 per cent of the equity ofinternet service providers and firms providing paging and bandwidthservices. Officials claimed these moves indicated the seriousness with whichthe Vajpayee government intended to achieve the current fiscal year's targetof an FDI inflow of US $ 10 billion. Against this ambitious target, actualFDI inflows during 2000-01 were less than one-fifth the amount at around $1.5 billion.
The following day, 10 May, Finance Minister Yashwant Sinha met the"Who'sWho" of the Indian corporate world and discussed steps to revive thesluggish industrial growth rate. As industrialist Rahul Bajaj stated afterthe meeting, the government as well as captains of industry were bothconcerned at the fall in demand. The same day, sales audit figures issued bya leading market research outfit disclosed a 3.3 per cent growth rate in thesales of fast-moving consumer goods (FMCG) during the January-March period.The rates of growth of this sector have come down each quarter in the lastfinancial year: from 11.5 per cent to 8.6 per cent and 4.3 per cent. Twomajor companies in this sector, Hindustan Lever and Tata Tea had recorded anactual drop in sales in the January-March period, the audit figuresindicated.
In order to provide a liquidity boost, the country's central bank and apexmonetary authority, the Reserve Bank of India announced on 12 May that it wasreducing banks' cash reserve ratio (CRR) - an indicator of the proportion ofbanks' reserves that has to be maintained in the form of readily-availablecash - to a record low of 7.5 per cent with effect from 19 May.
The same day, addressing a function organised on the occasion of the goldenjubilee of the National Sample Survey Organisation, Prime Minister Vajpayeestated: "There is no need for questioning the basic direction of our reformprocess. The need of the hour is to strengthen the national consensus onreforms." He acknowledged that economic reforms had been initiated by aCongress government and had been carried forward under two United Frontgovernments and was being actively pursued by state governments ruled bydifferent political parties.
The Prime Minister is correct, but only up to a point. The consensus oneconomic reforms has been breaking down periodically and this is mostevident in the Sangh Parivar itself. Senior leader of the RashtriyaSwayamsevak Sangh (RSS), the ideological parent of the BJP and founder ofthe trade union wing of the Parivar, namely, the Bharatiya Mazdoor Sangh(BMS), Dattopant Thengadi has still not expressed an apology for describingFinance Minister Sinha as a "criminal". Thengadi had flayed Sinha at apublic rally for encroaching into the territory of the Labour Minister whenhe announced the intention of the government to effect a series ofwide-ranging changes in the country's labour laws in his Budget speech.
If the Finance Minister has his way, the government will make it easier tohire and fire workers. This has predictably upset trade unions of allpolitical hues, not excluding the BMS. The RSS is particularly upset withSinha as its leader K S Sudarshan had, in March 1998, persuaded the PrimeMinister to nominate him as Finance Minister instead of Jaswant Singh. Itmay be recalled that Singh had held the Finance portfolio during the 13-dayVajpayee government in May 1996.
A weak Union government will find it difficult, if not impossible, to pushthrough politically-difficult economic policies. Witness the big hue and cryraised over the privatisation of Bharat Aluminium Company (BALCO). Note alsothe absence of consensus on whether India should participate in a new roundof negotiations at the World Trade Organisation (WTO). At a time whenemployment in the organised sector of the Indian economy has actuallyshrunk, the government will not be able to implement policies which areperceived to be against the interests of labour.
It is not just the public sector which has failed to create new jobs. Forthe first time in many years, some of the best-known names in Indianindustry are pruning their workforce. Such corporates include RelianceIndustries Limited. Even the head of Tata Steel, J J Irani, who used to takea great deal of pride in the manner in which his company would fulfil itssocial responsibilities, has had to post a posse of guards outside hisoffice at Jamshedpur.
The stock market scam, which removed all the sheen from Sinha'sindustry-friendly Budget within a few days of its presentation, is now beinginquired into by a Joint Parliamentary Committee. This too could add to thegovernment's diffidence in undertaking radical financial sector reforms atthis juncture. Farmers are scared of impending imports of agriculturalcommodities at rock-bottom prices and owners of small-scale industrial unitshave made common cause with their large corporate counterparts in opposingimports from China. The threat of cheap imports has partly contributed tothe fall of at least one state government, that is, the Kerala governmentwhich is excessively dependent on revenues from cash crops like coconut,rubber, spices, tea and coffee.
Whether the government likes it or not, the rate of growth of the worldeconomy - in particular the American economy - has come down. This is boundto have an impact on Indian exports since as much as a quarter of thiscountry's merchandise exports goes to the US. What makes matters worse is thatthree-fourths of India's software and information technology exports goto the same country. Indian stock exchanges have also been negativelyimpacted by the volatility of the NASDAQ.
Adding to the economic woes of the government, last year's revenuecollections have fallen below the "revised estimate" by roughly Rs6,000crore. The fiscal deficit would have been badly hit had it not been for thefact that expenditures have also come down to the tune of around Rs 4,000crore, curiously, on account of lower defence purchases in the wake of thetehelka expose. Normally, government purchases pick up substantially in themonth of March, but thanks to tehelka, defence expenditures got stalled.That is some consolation for a government whose image got badly battered bythe scandal.
Unlike countries like Italy and Japan where political instability has anegligible impact on the stability of economic policies, the situation inIndia is quite different. An unstable or a weak polity invariably has itsrepercussions on the economy. There is no doubt that tough times lie ahead.
(The author anchors "India Talks", a current-affairs interviewanddiscussion programme broadcast on the CNBC India television channel. Theprogramme has been on air since November 1995.)