BackFDI ≠ economic reforms
The touchstone for evaluating the measures announced is their effectiveness in holding the fiscal deficit at 5.1% of GDP
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“Big bang" reforms and “Manmohan gets his mojo back" are some of the reactions that have come in the wake of the Government of India announcing an increase in the price of diesel, limiting the subsidized cooking gas to six cylinders and inviting foreign direct investment (FDI) into multi-brand retail, civil aviation, power exchanges and in broadcast media. The conflation of FDI with economic reforms brings bad name to economic reforms and economic reformers.
First, one should not confuse the hike in the price of diesel with economic reforms. The mere fact that the government is announcing the hike in the price of diesel is a reminder of the pervasive role of the government in economic activity. Second, the hike in the price of diesel was due the moment the budget was presented in March. The oil subsidy provision was too low to be realistic. The sanctity of the budget estimate on petroleum subsidies could be maintained only if the price of diesel was increased immediately. A token increase that could be rolled back has come after six months.
The landed cost of imported crude oil—before duties—is up 2.1% in the new financial year and is up 24% from the lows of 21 June. Now that the US Federal Reserve and the European Central Bank have cranked up their printing presses, international crude oil prices will rise further. Under-recovery for Indian oil companies will go up further. Getting excited about this move is similar to the crowd cheering a batsman with a strike rate of 30 hitting a six in the 46th over after the asking rate had climbed to 20 per over for the remaining five overs.
The touchstone for evaluating the measures announced is their effectiveness in holding the fiscal deficit at 5.1% of gross domestic product (GDP), in taming the inflation rate and in boosting GDP growth through higher capital spending. FDI in multi-brand retail might boost the election prospects of Barack Obama rather than Indian GDP growth. India’s private sector aviation companies stalled the joint venture of Tata-Singapore Airlines in the 1990s to start a domestic airline company. Now that they are in trouble, they have successfully lobbied the government to allow foreigners to come to their rescue. This is the anti-thesis of market-friendly reform.
Recently, JPMorgan estimated that India’s potential GDP growth rate had slipped to around 6-6.5%. They were being generous. The actual growth rate in the April-June quarter was 3.9% (year-on-year). Banks are maxed out on loans to power distribution companies. Yet, power outages are rampant in several states. Making sure that electricity of consistent quality is available 24X7 is economic reform. It will add about 2% to India’s GDP growth. FDI in power exchanges will not eliminate India’s electricity shortage.
In education, between AICTE and UGC, compensation, fees and curriculum are dictated to, leaving nothing for innovation and capacity building. Consequently, no Indian educational institution figures in the global list of top 200 educational institutions. Enabling right skilling of Indians and getting the State out of the way at least in higher education is economic reform. Education reforms will also enable the Prime Minister to hire someone who can write a grammatically correct letter to foreign newspapers.
While concessions made on FDI might placate the foreign media that has been stridently critical of the Prime Minister lately, Indian institutions that receive foreign donations have not been so lucky. The Indian Institute of Technology at Kanpur was exempted from the Foreign Contribution Regulation Act last year only to be included in the list of institutions banned from receiving foreign contributions one year later. Eliminating sloppiness and arbitrariness in policymaking is economic reform.
There are over 30 million pending cases in Indian courts according to a PRS India research document published in July 2011. Assuming that both parties to the case have about five family members and providing for some double counting, at least 200 million Indians are entangled in some legal dispute or the other. Rise in stress and loss of productivity arising from unresolved legal disputes are substantial. Eliminating this backlog is economic reform.
Trying to influence expectations for the better is a legitimate tactic, when external events and forces induce pessimism and economic slowdown. However, when explicit acts of omission and commission on the part of the government over the last eight years have sapped economic dynamism, liberalizing FDI and getting cheerleaders to blow it out of proportion do not pass either the reform test or the credibility test. This is no different or better than the quantitative easing steps of Ben Bernanke and Mario Draghi—wrong diagnosis, wrong intent and zero effect.
The Reserve Bank of India did well on Monday to respond with just a token cut in the cash reserve ratio to 4.5% from 4.75%. Its policy guidance, too, was tempered. That is sensible. Likewise, investors should demand concrete action from the government on the shackles it has imposed on the economy and the society in the last eight years.
V. Anantha Nageswaran is the co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at baretalk@livemint.com
To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk
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