Mixed signals

The NDA government is caught between the need for market- oriented reforms and desire to fulfill social obligations

By Mohan Sule
There is growing impatience among foreign investors at the slow pace of reforms in India. Many assumed that Prime Minister Narendra Modi would undertake some radical steps to attract investments after assuming charge end May 2014. Perhaps they had not listened carefully. In his address to the new MPs of his party, he had wondered: If the government does not take care of the poor, who will? In the euphoria of the defeat of the corrupt UPA II government, the market chose to be selective in its understanding about the flexibility of the government in carrying out reforms. The issue is if reforms should be in one sweep or in installments. Diesel pricing has been deregulated but not LPG. The Big Bang reforms of Margaret Thatcher in 1986 transformed London into a global financial hub but also triggered criticism in the aftermath of the collapse of Lehman Brothers in September 2008 that banks embarked on risks not proportionate to their capital adequacy. The P V Narasimha Rao regime in India launched the most comprehensive restructuring exercise India had ever seen. The impact on the economy was equivalent to nationalization of banks and abolition of privy purses. In the era of coalition politics that followed, there was lack of consensus on how much to open up but not on the reforms process. Instability at the Centre, with successive governments lasting for a few months and even days, the foreign exchange crisis that tamed the SouthEast AsiaTigers, and the dotcom bust at the turn of the century ensured that policy makers did not have to do much to discourage foreign inflows. The 2012 verdict of the Supreme Court calling the January 2008 distribution of 122 licences for 2G spectrum on the basis of the first to comply with the conditions as “arbitrary” and “unconstitutional” and the recent cancellation of all coal blocks save four allocated since 1993 was a wakeup call.

The adverse fallout of the telecom scam was the policy paralysis for the remaining two years of the UPA II government. The positive outcome is that the activism of the apex court has given rise to the debate on the best possible way to dispose of natural resources. So far, the rulers had used their discretionary powers to reward cronies. There is a welcome realization that this method discourages entrepreneurship, thereby blocking the creation of jobs as well as innovation, so necessary for growth. At the same time, there is acknowledgement that auctioning, though transparent and fair, does not benefit the end users as the government tries to keep the base price high so as not be criticized later for selling the family silver cheaply. Winners try to recoup their investment through high pricing. Also, it fosters status quo. Only those with established deep pockets are in a position to tap the emerging opportunities. The 3G spectrum auction in 2010 saw participation of only seven private bidders. There were a mere five players bidding for just 102 of the 140 blocks in the GSM band in 2013. In fact, the presence of a large number of players in the 2G space earlier had resulted in fierce competition, leading to low voice usage rates. The outcome was deeper penetration of mobile services. After the shakeout, tariffs are once again on the rise. Service providers are happy but not consumers, who are facing less choice.

The decision to keep prices of coal controlled and Coal India intact, while auctioning the cancelled blocks for captive consumption, too, signals a cautious appoach. This could perhaps be to avoid trouble from trade unions on the eve of elections in Jharkand, which has the highest coals reserves in the country. The message is the government views PSUs as a vehicle to ensure cheap goods and services to poor. This is contradiction to Modi’s declaration in the US that the government has no business to be in business. The power generation sector is an example of half-baked reforms. Generators can produce power but pricing is subject to the regulator’s approval. Yet, they have to import coal at market-oriented rates as CIL is unable to meet demand. The government intends to lower its stake in PSU banks to 51% but wants them to be at the forefront of social programmes such as Jan Dhan Yojana, which is a high-cost operation due to the zero-balance requirement. This social outreach will make borrowers happy but not their shareholders just like those of CIL. Should investors stay with PSUs? With the example of the benign neglect of Air India following the entry of private operators and rising NPAs of PSUs even as private banks are proving to be nimble, investors would not be wrong to fear erosion in the value of their holding as the sectors in which state-owned enterprises are monopolies are thrown open to competition.