Ring out the old

Investors want to turn their back on half-hearted reforms that retain the power of veto and protect vested interests

By Mohan Sule


More than the covert liquidity injection spree by the new governor of the Reserve Bank of India, the belief that bond-buying by the US Federal Reserve will continue till its new boss settles early next year has triggered a relief rally in the market. The soft credit line extended to banks to enable them to lower interest rates on home and consumer loans is the RBI’s idea of a Diwali fix for an economy low on growth and high on inflation. Whether the fireworks crackle or turn out to be damp squibs will depend if the consumers squeezed by rising foodgrain prices and shrinking disposable income bite the bait. Nonetheless, foreign institutional investors have returned with a gusto, propping up equities and the rupee. Hopefully, this allows domestic investors — floating in an economy adrift in space due to the policy paralysis resulting from the many corruption scandals, battered by stocks and bonds waxing and waning to the sightings of the minutes of the Fed’s policy meets, baffled over gold’s status as a dinosaur or a new-age currency, and bruised by the Indian rupee sinking faster than the force of gravity — to look ahead with optimism, particularly with the opportunity round the corner to ring out the old and ring in the new. Adding to the chaos is the cross-connection between the government’s desire of a high-growth, plentiful-liquidity economy and the central bank’s goal of tight-money, low-inflation financial landscape. No wonder, investors want policy makers to shrug off their fears to approve legislations that allow industry to escape the Hindu growth rate faster than the velocity of Jupiter.

Clarity on the goal of reforms will sweep away much of the cobwebs of historical baggage. Foreign direct investment, for instance, is assumed to be one face of liberalisation, the other being foreign investment in the capital market. Right now both are viewed as means to accumulate foreign exchange reserves to finance imports, primarily energy. The objective was justifiable during the first phase of the opening up of the economy, when the country had to mortgage its gold as our dollar stockpile had dwindled to finance 15 days of imports. Understandably, a cap was imposed on FDI in some sectors, while a few were kept totally out of bounds. The second phase saw the ceiling abolished completely in many industries and lifted some more in certain others, while a few remained untouchable. In the third phase undertaken in the second half of this year following the free fall of the rupee on the flight of FIIs after the Fed dropped hints of winding up of its pump-priming program, 100% foreign owned companies were allowed to operate telecom services and make defence equipment and the level of FDI increased in insurance and aviation and to controlling stake in multi-brand retail. Yet, these steps did not generate the desired response due to the fine print imposing many restrictions. Reforms that go the entire last mile, particularly in sectors such as power and transport, without the ifs and buts that render the excercise pointless is what investors would like to see.

The experience so far is that the conditions attached are to serve two purposes. One is the desire of the policy makers and bureaucrats to continue to hold the veto. The stringent rules governing paybacks that foreign companies, particularly from the US, have to adhere while investing abroad blunt the diabolic charm of quid pro quo. The telecom and aviation sectors are apt reminders of how an uncertain policy environment can put off rather than attract investors. Second is to protect vested interests. Hence, the resistance to free completely fuel and power from pricing control. PSU insurers are used to bail out sick units and nationalised banks to waive off loans on election-eve. Safeguards and permissions at various stages have translated the land acquistion law as unworkable or at best a time-consuming process. Yet, where entry has been freed, consumers and investors have benefited from increase in transparency and quality of delivery. An effective regulator can ensure a level-playing field. In some markets, foreign brands have ceded to Indian makers, enjoying the edge of cost-efficiency. Of late, Indian entrepreneurs are acquiring assets abroad to diversify as well as to import these brands to take on foreign competition on home turf. Allowing businesses to decide investment based on demand outlook rather than on obstructionist regulations is what is needed in the coming year. Otherwise, India would be a barren land, with neither Indian nor global investors. If not for the reverse book-building escape plug, most of the listed MNCs would have exited by now. This regulation, formulated apparently to protect minority investors, has had the opposite effect of scaring potential foreign investors and is symptomatic of India’s obsession of safeguarding one constituency at the expense of the other.