It will not be premature elections but the health of the euro zone and the US economy that will drive the domestic market
By Mohan Sule
The UPA-II government’s rapid-fire reforms last fortnight will hasten its end. Even without any major policy initiative, foreign investors had started coming back to India since the beginning of this fiscal, lifting the broad market by nearly 19% till 14 September. Suspension of the General Anti-Avoidance Rules that aimed to tax foreign investors registered in tax havens for one year had improved sentiments. Liquidity injection by the European Central Bank and the US Federal Reserve had boosted global markets. As such the government could have just focused on day-to-day survival without shaking off its policy paralysis. Yet, unpalatable prescriptions such as increasing prices of fuels and opening up sensitive sectors for foreign direct investment were revived. The question is why now when any reform would have exposed fissures among coalition partners at a vulnerable time, with the government under attack for corruption. The first reason could be that the Commonwealth Games and the 2G spectrum and coal block allotment scams have pulled the stock of the UPA-II government to a bottom and nothing else could inflict any more damage. Second, various welfare programs including the rural employment guarantee scheme have boosted income in the hinterlands, as testified by the contribution of these regions to the top line of Indian Inc in the first quarter of the current fiscal, and increased their capacity to absorb small doses of hike in prices of diesel and LPG. Third, by dithering over opening of multi-brand retail to FDI, the Congress was unwittingly protecting the interest of mom-and-pop shops, which constitute the vote bank of BJP. Fourth, two of its supporters, the TMC and Samajwadi Party, have emerged from state elections recently and would not be in a position to fight mid-term polls now due to fatigue, depleted war chest, and a very short window for their policies to percolate to the grassroots.
In the meantime, the feel-good factor unleashed by the structural repairs could even be consolidated, providing Congress a chance to kick the winning goal. By then the various scams would be a distant memory for the voters just as the Bofors payoff did not deter them from giving Congress two consecutive terms. The euphoric reaction of the market has emboldened the government to dust off PSU divestment, another controversial measure, whose suspension was bolstering the constituency of CPM, which had withdrawn support to the UPA-I government after the signing of the US-India nuclear deal three years ago. Meeting the mop-up target of Rs 30000 crore would add fuel to the rally as the government would not have to divert funds from other sources to meet its welfare schemes, thereby reducing fiscal deficit. The success of the first batch of PSUs could also encourage the Reserve Bank of India, which retained the repo rate but reduced the cash reserve ratio last fortnight, to loosen up some more, thereby providing another boost to the stock markets, a winning combination indeed. But at hindsight, the risky gamble looks more like a self-inflicted wound by Congress rather than a masterstroke.
First, the positive impact of employment generation due to increasing the cap in retail and opening of the aviation sector to FDI could be visible over the long term. On the contrary, the adverse effect of hike in some petroleum products would be felt immediately. Second, it would be tempting for the allies of the Congress to distance themselves from the UPA government and covertly co-opt the opposition to precipitate elections before they become closely identified with unpopular but necessary decisions to bring the economy back into shape. In fact, by undertaking the bitterly contested reforms Congress has handed a gift to the opposition, who would be in a position to ride the discontent and at the same time saved from taking these very steps that would have become necessary if they were to form a government after the next elections. Does this mean that all the gains that the market has notched up would be wiped out if polls were to be announced before schedule? Not likely. Even a Third Front government with a regional leader at the helm will find its flexibility for posturing severely limited in the face on high interest rates and slow growth. More than domestic events, the availability of liquidity with foreign funds will dictate market trends. Another favorable indicator is the uncertainty in China. Its export-oriented economy is slowing down with unresponsive Europe and the US. This should keep prices of commodities down for India, with a little help from the appreciating rupee. For all the show of strength, history would judge Manmohan Singh as a reluctant warrior who picked up the gauntlet too late.
Mohan Sule
By Mohan Sule
The UPA-II government’s rapid-fire reforms last fortnight will hasten its end. Even without any major policy initiative, foreign investors had started coming back to India since the beginning of this fiscal, lifting the broad market by nearly 19% till 14 September. Suspension of the General Anti-Avoidance Rules that aimed to tax foreign investors registered in tax havens for one year had improved sentiments. Liquidity injection by the European Central Bank and the US Federal Reserve had boosted global markets. As such the government could have just focused on day-to-day survival without shaking off its policy paralysis. Yet, unpalatable prescriptions such as increasing prices of fuels and opening up sensitive sectors for foreign direct investment were revived. The question is why now when any reform would have exposed fissures among coalition partners at a vulnerable time, with the government under attack for corruption. The first reason could be that the Commonwealth Games and the 2G spectrum and coal block allotment scams have pulled the stock of the UPA-II government to a bottom and nothing else could inflict any more damage. Second, various welfare programs including the rural employment guarantee scheme have boosted income in the hinterlands, as testified by the contribution of these regions to the top line of Indian Inc in the first quarter of the current fiscal, and increased their capacity to absorb small doses of hike in prices of diesel and LPG. Third, by dithering over opening of multi-brand retail to FDI, the Congress was unwittingly protecting the interest of mom-and-pop shops, which constitute the vote bank of BJP. Fourth, two of its supporters, the TMC and Samajwadi Party, have emerged from state elections recently and would not be in a position to fight mid-term polls now due to fatigue, depleted war chest, and a very short window for their policies to percolate to the grassroots.
In the meantime, the feel-good factor unleashed by the structural repairs could even be consolidated, providing Congress a chance to kick the winning goal. By then the various scams would be a distant memory for the voters just as the Bofors payoff did not deter them from giving Congress two consecutive terms. The euphoric reaction of the market has emboldened the government to dust off PSU divestment, another controversial measure, whose suspension was bolstering the constituency of CPM, which had withdrawn support to the UPA-I government after the signing of the US-India nuclear deal three years ago. Meeting the mop-up target of Rs 30000 crore would add fuel to the rally as the government would not have to divert funds from other sources to meet its welfare schemes, thereby reducing fiscal deficit. The success of the first batch of PSUs could also encourage the Reserve Bank of India, which retained the repo rate but reduced the cash reserve ratio last fortnight, to loosen up some more, thereby providing another boost to the stock markets, a winning combination indeed. But at hindsight, the risky gamble looks more like a self-inflicted wound by Congress rather than a masterstroke.
First, the positive impact of employment generation due to increasing the cap in retail and opening of the aviation sector to FDI could be visible over the long term. On the contrary, the adverse effect of hike in some petroleum products would be felt immediately. Second, it would be tempting for the allies of the Congress to distance themselves from the UPA government and covertly co-opt the opposition to precipitate elections before they become closely identified with unpopular but necessary decisions to bring the economy back into shape. In fact, by undertaking the bitterly contested reforms Congress has handed a gift to the opposition, who would be in a position to ride the discontent and at the same time saved from taking these very steps that would have become necessary if they were to form a government after the next elections. Does this mean that all the gains that the market has notched up would be wiped out if polls were to be announced before schedule? Not likely. Even a Third Front government with a regional leader at the helm will find its flexibility for posturing severely limited in the face on high interest rates and slow growth. More than domestic events, the availability of liquidity with foreign funds will dictate market trends. Another favorable indicator is the uncertainty in China. Its export-oriented economy is slowing down with unresponsive Europe and the US. This should keep prices of commodities down for India, with a little help from the appreciating rupee. For all the show of strength, history would judge Manmohan Singh as a reluctant warrior who picked up the gauntlet too late.
Mohan Sule
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