Short circuit

Rajat Gupta’s shortsightedness and the UPA government’s short-term policies are remarkable for their destructive power

Mohan Sule

The fall of Rajat Gupta in the insider trading scandal in the US can be viewed as a proxy for the India Growth Story: euphoria followed by disappointment. Gupta was the first-generation immigrant who vaulted to the top of Corporate America on merit. This was what the new Shinning India was all about: education and hard work were the capital to invest in the opportunities thrown open as licence raj was dismantled. Instead, the reforms consolidated the position of the entrenched conglomerates as sectors monopolized by the public sector were transferred to the private sector oligarchs with ties to the ruling party or to those entrepreneurs willing to pay a premium. Telecom, aviation and mining, the three showcases of reforms, abound with tales of rules bent to create a distorted playing field. The problem stems from Indian policymakers’ reluctance to let go the barter system and cling to the constituency of a welfare state, sitting at odds with the idea of individual initiative to become wealthy where the field is leveled for all. Despite intellect, and not legacy, being solely responsible for his success, Gupta could not differentiate between gossip and leaking sensitive information to a hedge fund manager. It would be easy to attribute the downward revision in India’s growth to about 7% from 9% for the current fiscal to the euro-zone debt crisis and the slow recovery of the US and Gupta’s woes to a cultural clash in ethics and values. In the end it all boils down to wrong calls of judgment.

Wrong calls on restricting bidders to circles and categorizing them on technology  sowed the seeds to the scandal that saw the corruption of the second round of sale of second-generation telecom spectrum. The underselling exposed the worst-kept secret of policy making in India: the minister-bureaucrat-corporate sector nexus. As a result, first-generation entrepreneurs have to adopt unconventional means to gate-crash into the exclusive group. Top this with inordinate delays in clearing projects such as Vedanata’s acquistion of  UK-based Cairn’s stake in its Indian joint venture to explore oil and gas or South Korean Posco’s desire to mine bauxite in Orissa. Even when bills are introduced to bring clarity to issues such as acquiring land for infrastructure projects or awarding mining rights, the laws are biased against the investors. With elections happening in some corner or the other round the year, most legislations are written either with timidity or brazenly to woo a chunk of the voters. The out-of-control rise in prices is another spoiler. Initially, liquidity caused by foreign portfolio investment was held responsible. There was even talk of imposing capital controls or levying a withholding tax as done by some other emerging economies in South-East Asia and Latin America. Later, the flow of foreign investment into the stock markets slowed down due to the sovereign debt crisis in Europe but headline inflation showed no signs of receding. It was then realized that surging food prices was the primary contributor. An expanding middle class and those lifted above poverty by the rural employment schemes were fuelling consumption of food items and boosting their prices.

A good southwest monsoon was expected to cool down foodgrains on higher output. Instead of a resolution, the problem has got compounded. The minimum support prices were increased recently to insulate farmers from the anticipated downturn in prices. In the meanwhile, the Reserve Bank of India has ramped up interest rates 13 times in 19 months, further hurting manufacturers already battling costly raw materials. The bottom line is prices remain untamed in spite of higher interest rates and slowdown in foreign capital inflow. The spurt in the wholesale price index caused by protein-rich diet and that by dollars chasing assets have to be viewed as separate events requiring different treatment. Yet the central bank has adopted a one-size-fits-all strategy. Making the RBI’s job more difficult is the government’s borrowings to fund social welfare programs on the eve of a clutch of crucial elections. Thus, instead of becoming the center of gravity by leading the recovery of global economy with structural reforms to make investment in infrastructure projects attractive, undertaking prudent fiscal measures to keep inflation under check, and speeding up PSU divestment, policies tailored for a limited purpose — establishing footprints in the Uttar Pradesh election to pave the way for the fourth generation of the Gandhi family to rule India — have short-circuited India’s Growth Story just as Gupta’s alleged desire to gain a quick entry into the millionaires’ club destroyed his reputation built over years of hard work and brilliance.

Mohan Sule