By Shanmuganathan Nagasundaram
In what was probably his most significant day as a Prime Minster of India in his second term, Manmohan Singh initiated a slew of reforms that included increasing diesel prices, allowing foreign direct investment (FDI) in multi-brand retail and aviation and raising resources through divestments in public sector units (PSUs).
The markets responded positively with the currency also showing significant appreciation as a reaction to these “bold” initiatives (though the other significant contributor to these moves would have to be the “QE (quantitative easing) to infinity’ plans announcement of Ben Bernanke).
Manmohan certainly needs to be appreciated for these initiatives. In what’s been a frustrating wait, all that Manmohan found time for was to indulge in all kinds of populist and non-market interventions and very few real reforms have happened in the last eight years. And even these initiatives, “bold” as they sound, are so only in the context of Manmohan Singh’s past under-achievements.
In absolute terms, we are still barely scratching the surface in terms of meaningful reforms that are required to meet the aspirations of the growing middle-class – or for that matter, even to prevent a sovereign downgrade, for whatever the rating is worth. (I think all paper currencies should be rated “Junk” anyway).
Before discussing the individual issues, it’s probably worthwhile to point out that even after a two-decade reform process we are not a whole lot better than an average command-and-control economy. Manmohan’s flawed economic ideological beliefs (not his political inexperience, or the compulsions of coalition politics, as is commonly offered as an excuse) is the primary reason for the lack of progress and this is what prevents him from initiating the basic reforms that are indeed.
Yashwant Sinha’s phrase (though he was as great an underachiever as FM) about Manmohan Singh being “an overrated economist and an underrated politician” probably is very indicative of the status of Manmohan Singh today. As I have explained in “Saving India from the Keynesians”, Manmohan Singh has miles to go before India can sleep.
Diesel price increases
Too great a deal is made out of the Rs 5 a litre increase and that is probably very indicative of the very low levels of expectations that people have of this government. Does it make the oil marketing companies (OMC) even close to profitable? Does it ensure that diesel price increases will happen when crude oil prices increase in the next few months? Does it even alter anything other a decimal number in fiscal deficits? At a very basic level, shouldn’t the pricing of a “good” be left to the companies and markets?
In an ideal world, the government should divest its stake completely and allow the OMCs to operate the way other retailers do. For those who argue that petrol and diesel are very fundamental commodities, in that case I would say that the greater is the need for market pricing to prevent distortions and misallocation of capital and resources. The Manmohan Singh belief that a politician sitting in Delhi should decide the price of a good sold in every nook and corner of our country is very indicative of the continued belief in Nehruvian socialism.
Selling stakes in PSUs
“Lies, damned lies and statistics” used to be the phrase indicating the persuasive effect of using numbers. We need to refine that phrase a bit and it should sound like “lies, damned lies, statistics and government accounting”.
Firstly, selling PSU stakes to fund revenue expenditure is like selling family silver to meet food expenses and using those exceptional incomes to conjure up a lower fiscal deficit is blatantly misleading. Ofcourse, the fact that we are not even accounting for the deficits of states as well as the off-balance sheet liabilities like the losses of state electricity boards’ losses tells its own story. Even with that abysmally low standard, we are not even close to meeting our already downgraded standard for fiscal deficit is a telling commentary on the state of governance under Manmohan Singh. How one draws solace from this position is beyond my imagination?
Of course, the right thing for Manmohan Singh to do would be to slash government expenditures across the board. What prevents him from doing this is as much a function of his flawed Keynesian ideology (which led to the creation of massive capital misallocation through NREGA and other schemes) as is coalition politics.
FDI in retailing
Announcing 51 percent FDI in retailing is a welcome first-crawl. Of course, it comes with a huge baggage in terms of regulations such as sourcing from local vendors, setting up back-end infrastructure, etc. Companies are going to waste half their time in trying to prove that they are complying with these regulations rather than working towards satisfying the needs of their clients. Imagine how the Indian software companies would have grown had the government put in rules like recruiting 30 percent rural students, 20 percent from minorities, etc, as a quid pro quo to the tax breaks. That the software companies automatically did these without consciously targeting as well without onerous regulations is the result of capitalism.
By implying that without government regulations companies would automatically look for windfall gains and a quick exit, Manmohan Singh gives laissez-faire capitalism a bad name. It’s not that I believe in the goodness of men and all that – just that markets would quickly weed out the crooks and it’s precisely government regulations that ensures that these crooks get rewarded, as we have witnessed for the last few years in the resources sector. Capitalism automatically creates the most moral and compassionate of societies and unless Manmohan Singh can understand that, our progress is going to be halting.
Too much has been made out of the above initiatives. Even if all of the above initiatives sail through smoothly, calling them even a step in the right direction is an overstatement. In the context of what needs to be done, it’s at best a crawl. Of course, in the context of the slumber of the last few years, it’s probably a giant leap.
For all his reputation as an “outstanding economist”, Manmohan Singh has virtually presided over a complete degradation of our country’s financial situation. And having personally unleashed the socialist Pandora’s box over the last few years, he has nobody to blame but himself for the predicament he faces.
Shanmuganathan “Shan” Nagasundaram is the founding director of Benchmark Advisory Services – an economic consulting firm. He is also the India Economist for the World Money Analyst, a monthly publication of International Man. He can be contacted at firstname.lastname@example.org