The force disrupter

The young in India need stamping out of crony capitalism and creation of jobs and not subsidized power and free water

By Mohan Sule

How quickly has the sense of optimism at the turn of the New Year been dashed. Hopes of a stable one-party government after the general election due in a few months have given rise to concern that India may be going back to the days of unstable, left-leaning and short-lived governments of V P Singh, Chandrasekhar, H D Deve Gowda, and I K Gujral, who created havoc with public finances in the name of populism. The turning point, of course, was the mortgage of the country’s gold reserves early 1990s. India once again is poised at a critical juncture, with the US Federal Reserve beginning tapering of liquidity injection. High inflation and low growth pose a challenge of attracting liquidity to take care of supply-side issues and at the same time of controlling credit outflows. The combo of Reserve Bank of India governor Raghuram Rajan and Union finance minister P Chidambaram has managed to stem the slide of the rupee by slowing down unnecessary imports. In the process, they have built up forex reserves to tackle any dollar shortfall on Fed’s gradual reduction of its bond-buying program, instilling confidence in the market. The anticipated crowning of Narendra Modi, with a track record of good governance in Gujarat, had propelled foreign institutional investors’ return to India. The guerrilla win of Aam Aadmi Party in the Delhi assembly elections, however, has the potency to damage the economy the way Sonia Gandhi-headed National Advisory Council did during the two terms of the UPA govenment.

There are some indications that the power of subsidies and freebies has been overestimated. Delhi was the first state where food security was implemented. Chhattisgarh had become the laboratory to examine the efficacy of the direct cash transfer in lieu of subsidized products. The Rajasthan government distributed free medicines. Nothing worked as the ire against corruption overwhelmed cheap essentials. What did was good governance in Madhya Pradesh. Phasing out of subsidies is inevitable as India transforms into a developed country and the share of services in the gross domestic product increases. Making the transition smoothly is the crucial differentiator between progress and chaos. The UPA II government could not make the grade, mistaking the short-term pain for terminal despair. Waiver of farm loans and the guaranteed rural employment scheme were short-term prescriptions to the upheaval caused during this phase. Their contribution in getting the UPA government a second term led to the belief that the electorate needs to be wooed by welfare schemes. In retrospect, this calculation has proved off the mark as the population has graduated to the next level of the progress curve. The AAP, too, is repeating the error, forgetting that an important pillar of its support is youth. Agitating this section is the lack of opportunities for growth due to cronyism. Telecom spectrum and coal blocks were sold to those close to the policy makers rather than to those competent to run them. The most visible benefit of liberalisation is the creation of jobs. A landscape bereft of market-hungry companies cannot produce this growth. The young voter, therefore, has to understand that a government that empowers them to pay for essentials such as power and water at competitive pricing is the best bet for the long-term sustainability of a comfortable future.

The goal should be growth with transparency. India’s economy is evolving and there are bound to be missteps. The journey of the telecom sector best symbolises the process of opening up the economy on a trial-and-error basis due to the uncertainty of the potential and which degenerated into a get-rich scheme after realization of the market size. A valuable lesson learnt is that there is no fixed method to implement reforms. The changes, however, should be part of the objective of a policy focused on fiscal health rather than on appeasements of different constituencies. This is because stickiness of investment is important. This was underlined during the flight of foreign portfolio capital on indications of Fed’s reversal of easy money policy. The importance of foreign investors will be easily understood if AAP scrutinizes two of its poll promises: accessible and cheap water and electricity. Infrastructure projects in a country of the size of India require huge capital. There are only two ways to tap funds: Allow foreign investors to invest directly in these projects or ask Indian promoters to implement them by raising funds in the foreign markets. Hence, a healthy capital market where well-managed and profitable companies are sought after is essential to meet the basic needs of the aam aadmi.