India Is Likely to Move Out of Policy Logjam

The last few months of Pranab Mukherjee (India’s prime Presidential candidate now) being at the helm of India’s Ministry of Finance has been tumultuous, to say the least. Maybe, not as much for him but surely for the economy, as a whole. Not that the entire blame lies at his doors. The global economy continued to hurtle from one disaster to another. The Congress party (the single largest party in the ruling coalition government) fared very poorly in the much anticipated state election – thereby providing more fire-power to emboldened opposition and recalcitrant allies. The situation worsened further when India’s Supreme Court penalised (rightly) some Indian ministers for their corrupt practice in allotting 2G telecom licenses but also penalised (wrongly) the investors (including all the foreign investors) by scrapping all the licenses. As the confidence of the investors were shaken, Mukherjee decided to add further fuel to the fire by taking decisions that shook investor confidence and introduced a great degree of scepticism. The introduction of GAAR when confidence has been shaken and amending tax laws retrospectively (inspired by the decision to force Vodafone to pay tax for an offshore deal, although the Supreme Court had already ruled in their favour) sent a clear message to the investors, especially the foreign ones, that the policy environment in India is highly unstable and that the government may occasionally not choose to play fair. More importantly, despite facing all around criticism, Mukherjee chose to stick to his guns thereby dealing a body blow to the already floundering economy.

Mukherjee’s elevation (virtually certain) to the position of India’s President, therefore, can be seen as a blessing in disguise. It’s a win-win situation for both Mukherjee (who, the seasoned politician that he is, aspired to be India’s Prime Minister but realized that India’s Presidency was the next best option available to him) and the Indian economy (given the likelihood of the imprudent decisions being overturned). Mukherjee resigned on 26th June and India’s PM Manmohan Singh took up the additional responsibility of the Finance Ministry. Singh’s (the architect of India’s reforms programme in 1991) assuming the responsibility was the right thing to do at this juncture. Among his early statements was his intent to “revive the animal spirit in the country’s economy”. As if on cue, Ikea, the world’s largest furniture retailer, announced that it would invest as much as €1.5bn in India over the next few years. Even Coca Cola announced that it would invest US$5bn in India by 2020.

Singh on his part also started making the right noise. With intent to improve investors’ sentiment and allay their fears, he announced that the provisions of GAAR and retrospective tax laws will be amended appropriately. There is now a wide-spread belief that the government would also go slow on Vodafone tax claim and may even jettison the idea down the line. Even on the issue of 2G spectrum allocation, Singh is moving very pragmatically. While the Dept. of Telecom (DoT) has been making all the wrong noise about spectrum allocation including asking the existing players to cough up license fees for the remainder of their license period (which is bad in intent and spirit), Singh is clearly against this and has opposed this. There is now also a possibility that FDI in multi-brand retail will start rolling out soon. There is a likelihood that the policy will be notified after the presidential election is over and it will be projected only as an enabling policy in that, the states would be free to decide on whether to allow it or not. Those who want FDI can roll it and those who oppose it would not do so. As I have been saying all this time, while big ticket reforms that require legislative approval may not be a possibility in India till the next general election (2014) is over, the government ought to move ahead with policy decisions that are executive in nature and enabling those can remove some roadblocks impeding the economy. The decision on FDI is one of those. That apart, there are issues like the ensuring of appropriate fuel linkages for various power projects (including a few Ultra Mega Power Project or UMPP) that are held up at various levels, environmental concerns, land acquisitions etc. Investment in India has been experiencing a clear slowdown over the past few years and the stalled projects do not help. According to Centre for Monitoring Indian Economy (CMIE), as of 31st May, 12 projects worth Rs.101bn are stalled. Hopefully, under the stewardship of Singh, the policy logjam visible thus far, may slowly give way.

2 Responses to "India Is Likely to Move Out of Policy Logjam"

  1. Amar   July 6, 2012 at 5:40 pm

    Hi Kunal,

    Great article. I believe you have nailed it on the head, even as many experienced analysts are still skeptical about anything happening on policy / reforms process. However my own analysis suggests that reforms process is very likely to be back on track now, after a gap of more than half a decade.,

    Pasting below a story I did very recently.

    Pranab & Mamata Out, Mulayam In: Reforms on – II

    All the messaging from the Prime Minister’s Office continues to point towards only one thing – reforms are on!

    In my story last week (Pranab & Mamata Out, Mulayam In: Reforms on!), I pointed out how, with Mamata sidelined, Mulayam in its fold and Pranab as president, Congress has not had it so good in many years. And that meant the reforms process was now on.

    In fact, I had pointed this out as far back as May 2012 (Reform Initiative: Mulayam to decide, not Mamata nor Manmohan). This was after Mulayam “pledged” support to the UPA government.

    “So what does that mean now for some of the major reforms and other governance measures that have been on the backburner? Many of those measures are likely to go through … Mulayam is expected to be flexible …”

    The government’s decision to postpone implementation of GAAR-related tax provisions by one year, and a promise to clarify the provisions and remove uncertainties in the minds of foreign investors, was a major sentiment booster, with equity markets going up nearly 5% over the past week.

    This was followed by an interview of the prime minister with Hindustan Times yesterday, where the messaging continued. “The India growth story is intact. We will continue to work, as we have been doing for 8 years, to keep the story going,” said PM Manmohan Singh. He further said that in the short term the plan is to focus on bringing complete clarity on all tax matters, control fiscal deficit, revive mutual fund and insurance industries and provide a major push to infrastructure.

    This messaging continues with reports that the government might bite the bullet on diesel subsidies, with partial decontrol of diesel prices after the presidential elections.

    So why had the reforms process stalled for so long? There was a nice story in FirstPost a few days back (PM-Pranab-Sonia hiatus was key cause of policy paralysis), which captures some of the background dynamics that might have contributed to this situation. Here’s what it says:

    “It seems the PM wanted to keep the finance ministry with him even in 2004 but was dissuaded from doing so by the party. So Chidambaram got the job. When Chidambaram was removed in 2008, Pranab Mukherjee got it. After UPA’s resounding victory in 2009, the PM made another bid for the job and failed.”

    “What this history makes clear is that Dr. Singh was always keen on doing the finance minister’s job himself, or getting another economist whom he trusts to do the job for him.”

    “The gap between the PM and his FM grew widest during the tenure of Pranab Mukherjee, when the latter subtly kept the PM out of the loop. The possible reason is ego: Pranab felt that he was Manmohan Singh’s senior in politics. (Mukherjee was FM in the 1980s, when Singh was just a bureaucrat under him.)”

    All in all, after a very long gap, there seems to be some real hope that the reforms process is getting back on track.

    Amar Harolikar
    Unknown Insights

  2. Kshitij Gupta   July 10, 2012 at 7:34 am

    Pranab's tactics looked more like a Machiavelli's moves towards a PM he wished to replace. Infact the entire Congress disowned Manmohan Singh and would have liked to do a Brutus behind his back. Just simple power play. Who cares for a PM who had little backing at the grass root level ? "Lets screw him ! "
    With the critical finance ministry back into his fold, he should do what he does best……bring the economy on track. This was the same man who took us to IMF during the last currency devaluation in 1990s and nursed the economy back. Twenty years down the road we are back to the same spot !