The +5 -5 Conundrum

I find the United Front government has performed the best of all governments so far. In terms of the economy, I can hardly fault this government with anything. In fact, history might just prove that compared to other governments, these last two regimes—the UF government and the Narasimha Rao one—have done the most for the country and its economy." "Industrial growth has plummeted with no or low orders. Inventories are piling up and industry is resorting to production cuts. Investment is on hold in the absence of effective demand and crisis of confidence. This is true right across capital goods, basic goods, components, consumer goods, consumer durables, credit off-take and signing of contracts." The first speaker is R.H. Patil, chairman of the National Stock Exchange. The second is N. Kumar, president of the Confederation of Indian Industry (CII).

When Outlook contacted leading industrialists, economists and stockmarket players for a post mortem on the economic performance of the 18-month-old UF government, we found opinion generally divided. Yet a few common themes emerged.

For instance, banking reforms. "An extremely positive performance," feels Lester Pereira, director-treasury, Barclays Bank. "Highly commendable. What this government has done for the banking and financial sector in two years has paved the way for everything that it couldn’t possibly do in others." Cash reserve ratios for banks have been slashed, interest rates have fallen, banks have been given more autonomy. But Subodh Bhargav, chairman, Eicher Group, would give only 5 marks out of 10 to the government. For every step taken towards opening up, the government was held back by political compulsions—especially the necessity to keep the Left happy—on some other move. "While the credit policy and its direction have been given autonomy," says he, "other reforms like in the insurance sector have been stalled."

Even inflation control—inflation rates are down to a record low of 3.2 per cent—does not get unqualified praise from the experts. Says Suresh Krishna, chairman and managing director, Sundaram Fasteners: "The government has done well in controlling inflation, but I think it was excessively obsessed with this. " Just like Manmohan Singh was in his last two years as finance minister. It did not translate into an electoral triumph for the Congress, because a single-minded focus on just one factor of the economy ended up squeezing money available for industry to set up projects and slowed down industrial growth. Which ended up hurting the common man. In fact, top Mumbai stockbroker Parag Parikh shrugs away the UF government’s achievements in this area as "effects of past work and policies", and not finance minister P. Chidambaram’s contribution. And noted economist Surjit S. Bhalla has quite another take: "Inflation has declined not because of anything we have done but as a result of global imperatives."

The only area where the experts appear unanimous in giving a great deal of credit to the government is taxation policy. "Lots has been done on the income tax and corporate tax fronts," says Krishna. "We have a world class tax regime now," says L. Lakshman, president of the Associated Chambers of Commerce. "Outstanding," opines Bhargav, but says he wouldn’t give the government full marks here, because he is conceptually against confess-and-get-away schemes like VDIS: "This sort of scheme rewards criminals and makes honest people look like idiots."

 What is clear is that the love affair between industry and Chidambaram which started with his second Budget had cooled dramatically towards the end. To be fair, with Chidambaram’s first budget rather tame, when he presented his radical proposals this February, corporate India did an overcorrection in its reading of the FM.Hopes soared too high for them to ever stand a chance of being fulfilled. And when Chidambaram’s policies lost their way somewhere between announcement and implementation, he fell harder in corporate India’s esteem than he deserved. This was first visible in Gujral’s October meeting with industrialists when businessman after businessman attacked the government, forcing the normally cool finance minister to lose his temper more than once. As things started going bad, Chidambaram appeared to turn colder and retreat into his shell. Industry turned even more critical.

As far as industrial growth goes, companies are turning in some dismal figures currently. Growth is down, so are profits. Sectors like automobiles and consumer durables have been hit particularly badly. Gone is the great optimism that Indian industry showed in the first few months of Murasoli Maran’s tenure as industries minister. But almost everyone Outlook spoke to admitted that Maran had been one of the best industries minister in a long time. Industries Ministry bureaucrats too agree. The no-nonsense and efficient DMK leader slashed through paperwork, freed his officials from petty political control, and announced that the Foreign Investment Promotion Board would give its decisions on investment proposals within 15 days. So what happened? A chief reason for industrial stagnation is that the government cut its own investment without creating conditions for compensatory increase in private sector investment. As the government drew back from core sectors, the ripples spread, reducing demand and forcing industries to cut back on plans.

The other reason was that the inflation rate fell faster than interest rates, As a result, real interest rates—the difference between interest rate and inflation rate—have actually risen since last year. That has forced companies to put off their plans. In the meantime, banks, though flush with funds, turned overcautious, fearing a raid raj after a number of scandals broke out during Deve Gowda’s prime minister-ship. "There is at present a fear psychosis in banks—they are not lending readily," says Lakshman. To be fair, Chidambaram had asked bankers to lend more freely, and take risks, but the message did not seem to have percolated to the lower rungs.

The government’s achievement in the area of foreign investment, however, divides our experts almost down the middle. "Performance has been very good," feels Dr Rakesh Mohan, director-general of the National Council of Applied Economic Research. "Last year, $10 billion worth of proposals were cleared. This year too, it’s about $10 billion already." "The UF government has played a major role in marketing India abroad," says Kumar. "Foreign investment has done relatively well." Others disagree. "The potential for luring foreign investment is much more," says Krishna. "While $3-4 billion has come in, we can bring in at least $10-12 billion."

"Political uncertainty and instability is destroying investor confidence," says Lakshman.

Where has the government done truly badly? Infrastructure and public sector reforms is the unanimous opinion. In his first few weeks in office, I.K. Gujral almost positioned himself as the "infrastructure PM," emphasising that this was perhaps the most critical problem facing the economy: shortage of power, roads, ports, urban services. He put the Cabinet secretary in charge of an aggressive drive to get foreign investment in these sectors. Ministers, bureaucrats did slickly-mounted roadshows in the West, buttonholing potential investors and singing paeans about opportunities India offered. The net result has been a big zero. At the ground level, single-window clearances remained baffling labyrinths. Without the necessary legal and structural reforms in place, no investor cared to put his money down, keeping India on a one-way route to disaster.

The most charitable opinion here is from economist D.H. Pai Panandiker: "The United Front government did not move with the urgency and speed that was called for." But people like Krishna mince no words: "They didn’t get anything right."

The other clear failure has been public sector reforms. The Disinvestment Commission was set up, but Maran appeared to change his mind midway. The much-hyped navratna and mini-navratna schemes to give more autonomy and freedom to deserving public sector enterprises have remained almost wholly hype. "What they have got is limited financial autonomy without adequate freedom in management," says Panandiker. "Disinvestment has been an absolute failure," feels Bhalla. "The government has not been serious. No initiatives have been taken with regard to buying off workers or on unviable units." Here, the government came up against the Left, who would listen to no reason as long as its vote bank of unionised workers remained safe.

Move away from the concrete industrial jungle into the agrarian hinterlands, and here too the four-letter word—fail—follows the government. Says Ram V. Tyagarajan, chairman and managing director, Thiru Arooran Sugars: "There was hardly any attempt to introduce changes in this sector. Free market pricing and freedom to export agricultural produce are not yet realities and the system of support pricing continues for many commodities." "The improvement in agricultural production has been mainly due to good monsoons," says Panandiker. "The terms of trade have been moving recently in favour of agriculture as several controls are being dismantled and futures trading in pepper, cotton and jute products is being introduced," feels Kumar of CII.

 Months ago, agriculture minister Chaturanan Mishra accused the Finance Ministry of being disinterested in the agricultural sector. Mishra was one of the hardest-working ministers, but after decades in the Opposition, perhaps found himself unable to negotiate the undercurrents of governance. He sent in his resignation—Gujral rejected it.

The other minister who found himself helpless to some degree was B.B. Ramaiah, Commerce. Historically, the Finance Ministry and the Commerce Ministry have hardly ever seen eye to eye. The under-the-surface acrimony India witnessed when Manmohan Singh was FM and Chidambaram in charge of Commerce in the Narasimha Rao government, continued undiminished, except this time Chidambaram was the FM. His first budget in fact took away some tax concessions from exporters, who were dismayed to find their old trusted friend apparently deserting them. Ramaiah had been pushing for a devaluation of the rupee for some time now, since Indian exports were fast turning uncompetitive in the world market with the rupee overvalued. The government resisted, until the South East Asian currency turmoil left it no choice but to allow market forces to bring the rupee down. "But the correction did not come in time," says Panandiker.

Bhalla is harsher. "The exchange rate policy has been flip-flopping with the Reserve Bank of India acting more like a short-term trader than central banker," he says. "This has been disastrous." The rupee has already fallen below Rs 38.50 to a dollar, the lowest ever exchange rate, but exporters feel it’s still overvalued. Some Asian currencies have fallen by 40 per cent or more in the last two months, and the rupee down by only 10 per cent is not enough, they say.

So what’s the epitaph for these 18 months? What about: "The spirit was willing, but the flesh was weak?"