India Sinking: Industry chokes on govt's 'kiss of death'

Q: What’s worse than a government that’s asleep at the wheel - and frozen in policy paralysis and neglectful of the economy and of the private sector, as the UPA government was for all of the last two years?

A: A government that, in full wakefulness, does seemingly everything in its power to sabotage the economy and tie up the private sector in bureaucratic red tape and regressive policy that is more reminiscent of the licence-raj era of the 1970s.

The novelist Truman Capote observed that more tears are shed over answered prayers than unanswered ones. In all the time in 2010 and 2011 that the captains of Indian industry were wringing their hands in despair and fretting about the government’s “policy paralysis” following the exposure of sensational corruption scandals, they were sending prayers heavenward for a government that would come out of its stupor - and get cracking on policy initiatives.

It just so happens that their prayers have been answered, but - as Capote observed - it’s only brought yet more fretful tears and agony for the industry.

That’s because a government that has been jolted awake has gone into policy overdrive with a serious of egregious decisions relating to several critical sectors that have had India Inc recoiling in horror.Simultaneously, the government, wielding a tax bludgeon, has caused foreign investors to hotfoot it with their barrel-loads of money - precisely at a time when global uncertainties were building up over the eurozone crisis - causing the rupee and the stock market to go into free fall.

The irony is that, as a study cited by India Today in its most recent cover story (not available online) points out, sectors that have a close interface with government are struggling. On the other hand, companies in sectors that are at arm’s length from the government are doing reasonably well - as reflected in the quarterly results of nearly 1,000 companies between January and March 2012.

Indicatively, among some 989 companies (that account for 52 percent of the total market capitalisation of the BSE), companies from five sectors - which are typically fairly immune to government policy - artificially propped up the net profits growth of Indian industry in the quarter to April. Without these companies, net profits of Indian industry actually declined by nearly 10 percent in the quarter.

In other words, the government, rather than creating enabling conditions for private industry to grow and thrive, is administering the kiss of death. Those that come into its fatal embrace are withering; those that have managed to stay reasonably out of reach of the government’s grubby paws are doing relatively better.

The problems arise at several levels. At one level, as Firstpost noted here ,the finance minister’s mindset reflects a statist “government knows best” mentality that prevailed in the 1970s and 1980s, when he entered politics. And second, his worldview is entirely in synch with the prevailing welfarist economic philosophy of the UPA government ( more on that here ).

Much of the blame for the change in the dominant narrative from one of an economically resurgent India to an India that is palpably in decline rests with the UPA, of course. But it couldn’t have happened in a political vacuum, and parties across the spectrum - including the principal Opposition, the BJP - have yielded space to the UPA by themselves scrambling for the lowest common denominator of the political economy.

Without the ballast of a robust counter-narrative, the UPA’s unsound economic philosophy has prevailed by default, without being severely tested in the marketplace of ideas.

What’s compounded the crisis for industry, of course, is that even the bureaucracy, which was sitting on its hands for much of last year, afraid to show any initiative in an atmosphere when just the symptom of life was a political risk, has sensed the political mood of the moment - and has come out with regressive policy recommendations that have been seized upon by the administrators.

Indicatively, India Today reports that the retrospective tax amendment on Vodafone and the General Anti-Avoidance Rule (GAAR) for foreign investors were put forward by Finance Secretary RS Gujaral, without consulting the Department of Economic Affairs, which oversees policy related to foreign investments and the capital market. The proposals became policy owing to a cunning sleight of hand: the proposals did not find mention in the Budget speech, which was vetted by the DEA, but were sneaked into the Budget document.

And beneath the surface, the bureaucracy, working merrily at cross-purposes, has joyfully recreated the red tape regime of a long-ago time. So, in his last days in office as Trai chairman, JS Sarma issues controversial recommendations for telecom spectrum auctions that are ruinous to both the industry and to consumers, and has caused a policy runaround within government. Likewise, former acting chairman of Coal India Zohra Chatterji studiously ignores PMO Principal Secretary Pulok Chatterjee’s directive to finalise fuel supply agreements with power producers.

In an episode of Yes, Minister, the Whitehall bureaucrat Bernard Wooley extols the virtues of red tape. “Red is fun,” he says. “It holds the nation together.” However, for an industry that is still yet to recover from its “answered prayers” from two years ago, the reams of red tape it is today ensnared in give cause for going off prayers altogether.