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Controversies such as pricing of gas and sovereign guarantee for a private
deal become irrelevant in a capital-starved economy

By Mohan Sule
Reform has become a fashionable prescription for economic woes. The one-size-fits all solution is offered for all sorts of headwinds facing a country including growth slowdown and surging inflation. There seems to be surprising unanimity that undertaking structural changes would enable a country to come out of its misery. Yet there is no consensus on what constitute reforms. Take the slump in the US economy following the failure of big banks. Liberals backed the US Federal Reserve’s decision to loosen money supply to ensure that lack of liquidity did not hamper risk taking, considered vital to boost expansion. The downside of this strategy is formation of asset bubbles. Conservatives protested, finding virtue in cutting public expenditure to balance the budget, which would support lower interest rates and thereby encourage capital expenditure. The flip side of this approach is invitation to recession. No wonder reform has become a loaded word. For proponents of free market, withdrawal of government from running businesses is an essential ingredient even though this may lead to strong players overwhelming the market. At the other end are those who hold government responsible for creating jobs, keeping prices low, and ensuring affordable housing despite the danger of snuffing out the animal spirits of entrepreneurs. It is when neither system is able to achieve the desired result that there is a clash, with either side wishing for just that much supervision or back-off by the government but not able to agree to the extent of this meddling or non-meddling. The issue has once again come center stage in India following two decisions of the government.

The Supreme Court in its wisdom has classified natural resources as the country’s assets, thereby consigning its monitoring to the government. This could be viewed as an assertion that government has a role to play even in the reforms process or a setback to the concept of letting markets take care of demand and supply. Subsequently, the government okayed hiking the price of natural gas to bring it on par with international level and airline seat capacity on the Gulf route to attract foreign investment. On the face of it, the government is exercising its discretion to effect these changes, which it feels are crucial to carry forward the reform process. Embedded is the contradiction: government presence is sought to check price rise and protect indigenous interests. Higher gas pricing is bound to have a cascading impact on end products. Investors in domestic airports and airlines will see a large chunk of lucrative traffic shift to foreign shores. The end result, as per the government’s justification, would be more gas as well fertilizer and power output to fuel the growth engine and restoration of the health of the airline sector as Jet is the market leader. Thus, the pricing of gas and backing for an aviation deal between two private parties symbolise the unintended consequences of the reforms process that came to the fore during the launch of PSU divestment. To ease pressure on interest rates, investment spending has to shift to the private sector. Divestment of PSUs is an important component of this process. Investors, however, will participate enthusiastically if they have the freedom to a market their products and services. It is at this point that the tug-off between striking a balance between public good and private initiative becomes pronounced.

The example of the US government in bailing out bankrupt banks with tighter operating rules shows the advantages as well as the disadvantages of an economy where the private sector is asked to thrive under increasingly restrictive regulations. To prevent monopolies in the telecom market, policies frown on consolidation and pricing is reviewed by the regulator periodically. Yet the liberal grant of 2G licences in 2008, which can be viewed as an effort to encourage competition so integral to reforms, invited the SC’s ire. The net effect is an industry stunted by uncertainty. Unsure of the regulatory landscape a few years down there is no surprise that foreign investors like UAE national carrier Etihad are insisting on sovereign guarantee to avoid future uncertainty. Now 100% foreign direct investment has been allowed in telecoms, a policy that was resisted for so long because of the sensitive nature of the sector. So the initiation of reforms by allowing private investment in hitherto prohibited sectors but checkmating investors from undue profiteering by keeping them on a tight leash is racing to a conclusion that was sought to be avoided: the slow but sure crumbling of entry barriers is diminishing the power of intervention. In a throwback to the post 1991 opening up to stave off an economies crisis triggered by the drying up of foreign capital, any doubts about the side effects have been rendered irrelevant.