Cautious love

Instead of big-bang reforms, indications are of incremental opening up in a balancing act
By Mohan Sule
Prime Minister Narendra Modi is a man in a hurry. He has to undo in 60 months the mess that took Congress 60 years to perpetuate. He has to exhibit decisiveness instead of silence, vest the PMO with the powers that had been usurped by parallel power centers, demolish votebank politics, put nation before party and propel India on the path to prosperity. In trying to achieve this, he warned, he would turn unpopular from being merely polarizing. Eventually, he admitted unabashedly, he would win over the love of his country. For the electorate who had backed Modi with a massive mandate in the hope of good days of low prices, 24 hours of power supply, whizzing away in bullet trains, living in smart cities, cheap healthcare, clean rivers and jobs aplenty, the tune did sound jarring. The first dose of the bitter medicine was an increase in passenger and freight fares. Sugar prices spurted on hike in import duty to fetch domestic producers, saddled with debt and unable to pay cane farmers, better prices. While users groaned, the market applauded the steps, once again crossing the 25,000 mark after slipping on worries of spurt in crude oils prices due to the civil war in Iraq. Railway-related and sugar stocks surged. Diesel prices have been rising by 50 paise per month and PSU oil marketing companies are buoyant on hopes of deregulation. The IPO market is stirring with buzz about PSUs and private sector companies lining up for stake-sale.

Despite the revival in business confidence, major challenges remain. Inflation is a key concern. The wholesale price index touched a five-month high in May 2014. The threat of El Nino is real. The southwest monsoon had remained elusive till end June. Onions are proving to be tearjerkers. There is talk of action against hoarders. The partial rollback in Mumbai’s suburban train fares shows the tough task ahead. It looks like an incremental approach to reforms will have to be adopted. Elections are due later this year and next in important states such as Maharashtra, Haryana, Jharkhand, Jammu & Kashmir, Bihar and possibly Uttar Pradesh. Yet Modi should not fear of becoming unpopular. Voters braved above 40-degree centigrade temperature to put him into power with a simple majority. The election conclusively rejected the welfare model of governance, which was considered necessary to get elected. Despite food security right and guarantee of rural jobs, India has opted for an economy that creates growth and not the one that barely meets basic needs courtesy the dole-outs of the government. As Modi has reiterated, development has to be a mass movement like the freedom movement. He should use the example of telecom and two-wheelers to illustrate how a free market can benefit the users through choice and lower prices in contrast to shortages created by controlled pricing. Similarly, higher fuel prices will enable oil explorers and refiners to spend on exploration, leading to higher output. Oil marketing companies can use the money to increase their reach. On the flip side is the anemic sugar industry, with restrictions on cane pricing and selling output.

Besides the direct benefit of market demand-supply determining prices, there are three indirect advantages of phasing out subsidies. The government has to resort often to market borrowing to bridge the cost of selling subsidized goods and services because there is resistance to raising taxes to meet the revenue and expenditure mismatch. Its appetite overshadows the needs of the private sector in the capital market. The diminishing presence of the government would leave more money on the table for companies to fund their requirements and, thereby, lower the cost of borrowing. Softer interest rates will spur consumption and bolster the bottom lines of companies and spur job creation. The burden of higher fuel prices would be made bearable by cheaper credit and brightening job prospects. Ramping up of Railway fare would make the network efficient and enable it to increase coverage. Higher ticket prices could see diversion of some long-distance travelers to airlines, which are expected to see heightened competition. Subsidy paring will be viewed favorably by credit rating agencies and result in country up-gradation to investment-grade from near-junk status. This would accelerate the inflow of foreign investments. In fact, India could pay a crucial role in accelerating global recovery, with the country’s hunger for goods and services from the developed world and China increasing. The negative effect of the appreciation of the rupee due to foreign inflows, thus, could be blunted for export-oriented companies, whose main market is the US. The aftereffects would be felt in the medium to long term but the short-term impact of soft interest rates will provide the trigger.