Active Stocks
Tue Mar 19 2024 10:01:05
  1. Tata Consultancy Services share price
  2. 4,032.60 -2.71%
  1. Tata Steel share price
  2. 150.00 0.27%
  1. NTPC share price
  2. 313.55 -1.14%
  1. HDFC Bank share price
  2. 1,442.00 -0.29%
  1. ITC share price
  2. 416.40 -0.24%
Business News/ Opinion / Online-views/  Right or left, path is right
BackBack

Right or left, path is right

With wiggle room for policies limited by decades of Congress rule, the govt is doing its best to fix the mess left behind

Photo: PTIPremium
Photo: PTI

After the third budget of the National Democratic Alliance (NDA) government, many commentators had written off its “reform" credentials. They lamented that the government was not pro-market. In response, this column noted that we should end the tyranny of labels and ideologies and that economics was an empirical science where context mattered the most to policymaking. Decision-makers would be doing the right thing as long as they remained open to revising or abandoning their decisions in the light of emerging facts.

After the budget, the government announced two significant measures which are both right and of the “Right" variety. One was the comprehensive Hydrocarbon Licensing and Exploration Policy (HELP). The second, announced on Friday, dealt with various administered interest rates that were hindering the transmission of monetary policy.

HELP replaced NELP (New Exploration Licensing Policy), which had been around for more than 18 years. Two important features of HELP are that it is based on revenue sharing and that includes an open acreage licensing policy (OALP) whereby a bidder may apply to the government seeking exploration of any block not already covered by exploration. The old “profit-sharing" formula meant government approval at various stages to prevent the licensee from exaggerating costs; activities could not be commenced without government approval after scrutiny of costs. The government can claim, with some justification, that replacing profit sharing with revenue sharing advances the cause of “minimum government and maximum governance".

Of course, as with most policy decisions, the final proof of the pudding is in the eating. It remains to be seen if these policy measures can remove the psychological and real damage caused by notices served by the income-tax department claiming retrospective taxes. At the margin, HELP cannot hurt.

The government’s announcement on the interest rates for the various small savings schemes on 18 March is no less significant. It serves many purposes. It aligns the administered interest rates with interest rates paid by banks. In that sense, it helps to improve the transmission of monetary policy decisions. Once the Reserve Bank of India (RBI) decides to cut rates, banks are unable to cut deposit rates because of the higher interest rate available to savers in these schemes. Consequently, they do not cut the lending rates either for fear of causing an erosion of their net interest margin. Thus, RBI decisions do not affect the economy as much as they should. This decision goes a long way towards removing that handicap. The improvement would be short-lived and transitory had this been a one-off decision. But it is not. Two other things have been done along with the reduction in interest rates.

One is that these rates will be reviewed on a quarterly basis; the second is that they are linked to the yield on government securities over the previous three months. Indirectly, it is a marginal boost to fiscal discipline. Any increase in government bond yield due to the market anticipation of higher inflation or higher government borrowing due to fiscal slippage will also result in higher interest payments on these savings schemes. Therefore, the government has set up a reward for its own fiscal behaviour. Henceforth, fiscal prudence will not only be rewarded with low bond yield but also with lower payouts on savings schemes.

Overall, the import of these changes cannot be minimized. Reasonable observers would know that changing a government decision or policy once announced is not easy. A recent example is that of retrospective tax laws. Bank nationalization and the insertion of the words “socialist and secular" in the preamble to the Indian Constitution are of earlier vintage. These were politically motivated and not based on any other loftier consideration.

Yet, it is now considered politically suicidal to remove them. Their presence has undermined policy freedom for successive governments in many respects.

The attitude of the employees of IDBI Bank is a perfect demonstration of the adage that the evil that men (or women) do lives after them. IDBI Bank employees are opposed to seeing the government stake in the bank drop below 50%. They recently organized a tweet-a-thon to express their displeasure. It is quite hard to understand their rationale. There are more opportunities for growth, for material rewards. Global opportunities, too, could open up, once in the private sector. Yet, employees fear privatization. The banking sector is still too small for the country’s needs and so it can only grow. Therefore, fear of job insecurity is neither reasonable nor legitimate. There can be only two reasons: fear of accountability and reluctance to be more productive.

Therefore, with the wiggle room for policies limited not just by the legacy inherited from the United Progressive Alliance (UPA) government but by the legacy left behind by decades of Congress rule, the government is doing its best to fix the mess left behind by the previous government. That is what the previous NDA government did only for the incoming UPA government to capitalize on their reforms and leave a mess for the current NDA government to clean up. It will be to the good of India if the cycle does not repeat.

V. Anantha Nageswaran is an independent financial markets consultant based in Singapore.

Comments are welcome at baretalk@livemint.com. To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 22 Mar 2016, 12:20 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App