What investors want

The new government has to spell out a roadmap to free PSUs, control banks’ NPAs and reduce subsidies

By Mohan Sule

Despite attempts to frame the coming general election as a referendum on communalism v secularism by Congress and corruption v governance by BJP, the choice before the voters has never been as stark as it is today. Should India continue to trundle at the pace of a tortoise or is it time to unleash the animal spirits? A controlled economy allows the government to distribute wealth equitably. The cost of this protectionism is risk-averseness, tapering of investment and low growth. On the other hand, a market orientation ensures that demand and supply get balanced out on the basis of quality and pricing. The bill is a volatile market as consumption patterns undergo dramatic and sudden changes. Unsure of which route offered a faster gateway to prosperity, India experimented with a mixed economy for most part of its existence. The exercise undertaken in the last decade of the last century to discard the socialist baggage slowed down in the past 10 years of the two terms of the UPA government in the belief that reforms left out the marginalized sections. Inclusive growth became a populist slogan to disguise the building up of the biggest welfare state anywhere in the world. The problem is that however sincere the attempts might be to direct the flow of resources to those in need, subsidized food and fuel come at a cost. The price is sucking out of liquidity from the system and thereby starving productive sectors in need of cash, resulting in costly goods and services, thereby boosting inflation and interest rates. This combustible combination slows growth, punching a big hole in the balance sheet of the country.

The realization that a robust economy is necessary to even maintain a façade of compassion dawned too late on the UPA II government. After dismantling the NDA-initiated PSU divestment ministry and the fortnightly price revision of fuel prices linked to global movement of crude oil, the UPA government had to once again fall back on PSUs to bridge the fiscal deficit and fully decontrol petrol and partially diesel late 2012. The new dispensation that will take over by end May, investors are hoping, might learn from the disastrous regime of Sonia Gandhi. What do investors want? Essentially, their wish list is simple: a stable government with a sense of purpose. This will allow return of risk-taking. Pre 2008 collapse of the global financial markets, the Manmohan Singh government had taken for granted that India would be notching double-digit growth over the next decade, heady from the inflow of foreign funds, flushed with cash due to a soaring Dow Jones index and in search of yields. Instead of getting its balance sheet in order by cutting the subsidy bill, the UPA government launched resource-sapping programs such as farm-loan waivers and rural employment guarantee scheme without exploring matching revenues. Despite giving freedom to distribution companies to supply electricity at competitive rates, pressure from state governments have disabled their decision making, choking liquidity to generators, who on the other side are facing problems of procuring coal as price caps hobble supplier Coal India to deploy capital expenditure to expand capacity.

India remained immune from the chill of bank collapse and the contagion of the sovereign debt default spreading across the euro region due to tight controls. Yet, policy paralysis and crony capitalism are sinking banks under the weight of NPAs. Shockingly, the beneficieries of the opaque process to sell licences for natural resources and award contracts for infrastructure projects are provided access to tax payers’ savings. Unless this cosy club made up of families close to the ruling elite is closed down, it would be hard to put the banking industry back on track. This leads to the second wish: freeing PSUs. Despite a majority of them being listed, they are constrained from taking decisions that would benefit their bottom lines. For instance, oil-marketing refiners. Their monopoly status has proved to be a trap rather than a honey pot for minority shareholders. Any move to offer government stake for sale results in depression in prices. Hence, investors want a roadmap for slashing subsidy. This would include not only fuel but also power giveaways. What the new government can do is to take the subsidy burden on its own balance sheet by accelerating the cash transfer scheme to those unable to absorb the resultant price rise, leaving the PSUs to sell their products at cost plus. This would enable these companies to get better discounting and embolden them to undertake expansion and modernization. Last, investors want the sanctity of the market to be preserved. They can live with bad investment calls but not investment based on misleading information and rigged stock prices.