Politics has suddenly become the biggest risk for the world economy. Main Street is at war with Wall Street. Political risk is the catchphrase in investor lexicons today. Across the world, politicians are dragging their feet, unsure about how to stave off a recession, while fighting internal problems such as inflation, social unrest and the need to protect their constituencies. Indeed, for perhaps the first time, the International Monetary Fund, in its Global Financial Stability Report, talked about the economic crisis moving into a political phase.
The repercussions are there for all to see as the crisis enters its fifth year. Europe is still battling to stave off a debt contagion; Barclays Capital estimates that the crisis there is responsible for a $13 trillion erosion in global wealth since July. The US has been downgraded by Standard and Poor’s, which cited dithering in policymaking. In India, too, the government seems to be confused and indecisive, and investors are increasingly pricing in political risk.
People shopping in a shopping mall. Photo: Indranil Bhoumik/Mint
The paralysis in policymaking has been well-documented. The present government has not passed any reforms worth mentioning despite sweeping to power in May 2009. Still, things have noticeably worsened in the past one year as it battles a number of scams. A brokerage, which doesn’t want to be named, points out that bureaucrats are unwilling to take decisions because they fear that they may be questioned later on and be liable for prosecution. Thus, even a simple thing such as a request for proposal now takes up to a year, it said.
Also See | Policy Paralysis (PDF)
This indecision has hurt many public sector companies in varied ways. State Bank of India’s need for capital and the government’s unwillingness to take a decision in the matter led to a downgrade. Another example is the vacancies for top jobs in state-owned companies, or even those where the government only has an indirect control. Take UTI Asset Management Co. Pvt. Ltd (UTI AMC). Since U.K. Sinha left for Sebi, the chairmanship is lying vacant. The government is squabbling with strategic investor T. Rowe Price Group Inc. as it tries to appoint an IAS officer as UTI AMC’s chairman.
The Bills for mining and land acquisition smack of populism. Both Bills talk of sharing royalty and profits with landowners, and try to provide one-shot solutions for land-related issues.
The slowdown and rising inflation aren’t helping either. For one, the government wants state-owned banks to restructure loans by extending their repayment periods, the Business Standard reported. Another Mint story pointed out that banks may be even asked to inject fresh funds into distressed small- and medium-sized enterprises, forget the fact that the lenders themselves need capital and are facing rising non-performing assets.
The government’s wobbly balance sheet and the need to stick to its increasingly illusory budget arithmetic are adding insult to injury as it resorts to policy proposals that seem arbitrary. Suddenly, now the government is questioning the need for fuel subsidies, even as it desists from freeing up prices. Dow Jones Newswires reported that the Centre is planning to scale down its initial fuel subsidy estimate by Rs 5,000 crore as crude prices dip, and also, because of its higher borrowing target. Bloomberg reported that New Delhi was considering increasing Oil and Natural Gas Corp. Ltd’s contribution—a move that so clouded sentiment on the stock that its follow-on share sale had to be put off.
Secondly, as the Press Trust of India reported, the Centre is considering asking state-controlled companies to buy back equity so that the disinvestment target can be met. Remember, in the last fiscal year, the state-owned companies were asked to cough up higher dividends so that the fiscal deficit could be pared.
There is a belief in India that the economy will continue to grow more than 7% and foreign capital will flow back because of the lack of other options. But that can only happen if policymakers get their act together.
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PDF by Ahmed Raza Khan/Mint