Wednesday, November 23, 2011

Industry disenchanted with UPA

(First published in The Pioneer dated November 23, 2011)


The winter fashion season has arrived and Corporate India is all dressed up. But it has nowhere to go. There is a sense of despondency, if not utter despair, among its members, many of whom could not resist the temptation of airing their frustration in the open. Inflation is up and growth is down. The rupee continues to depreciate while fiscal deficit is poised to grow. Industrial production has dipped whereas bank interest rates have gone up. Key public sector units are posting losses while the UPA Government throws good money after bad projects that are driven by ever rising subsidies. Current account deficit is growing but collection of indirect taxes has fallen. Trade deficit is rising and agricultural growth has stagnated. While none of these grim situations is irreversible, no one in the Government is prepared to stick his neck out and offer a timeframe when things will begin looking up.

If that is bad enough, worse has come with the recent gloomy statements of key figures in the Government. Chief Economic Advisor to the Union Ministry of Finance, Mr Kaushik Basu has candidly admitted that the picture is far from “rosy”. The Deputy Chairman of Planning Commission, Mr Montek Singh Ahluwalia has conceded that he erred in projecting the inflation figures – headland inflation and food inflation – that continue to hover in the double-digit range despite repeated assurances that it would be moderated to the single-digit mark. The failed moderation, he added, has raised “questions” over the UPA’s credibility. To top it all, Union Minister for Finance Pranab Mukherjee recently admitted that the depreciation in the rupee will impact growth for the worse.

Just for the record, let us keep in view two projections made by experts across the board: One, growth could hover in the range of 7 per cent to 7.5 per cent during the current fiscal, down from 8.5 per cent in 2010-11. And, two, it is near impossible to restrict fiscal deficit to 4.6 per cent of the Gross Domestic Product during 2011-12, in view of rising fuel prices and the growing burden of subsidy; we may end up with a deficit figure of more than 5 per cent. A third may be added: The rupee is not likely to appreciate very much against the dollar in the coming months, because, among other things, the American currency is getting stronger as a result of the messy Euro.

Corporate India has several solutions to offer. Some are concrete while others are merely aspirational. It is seeking to provide a sense of direction to the Government, though it should have been the other way around. But the corporate sector too is disunited in the hour of reckoning. On the one hand a section is petitioning the Government to intervene in the Kingfisher Airlines crisis. But on the other there are influential voices opposed to any ‘bailout’. If representatives of the airlines industry are demanding a slew of measures like lower taxation on aviation turbine fuel and the flow of foreign direct investments to resuscitate the domestic civil aviation industry, others like Mr Rahul Bajaj have asked market forces rather than the Government to determine the fate of Kingfisher. His scathing one-liner, “Those who die must die”, is, to put it mildly, a radical approach to the problem. Though he later clarified that his comment was not specifically directed at the airline but industry in general, the context in which he said it has not changed. We do not know if the remark has many takers in corporate India, but the aviation sector must be seething in anger since many within in it could soon be in a situation similar to one that Kingfisher finds itself in.

All the same, Corporate India is united in one thing: Its firm belief that the UPA 2 regime has lost direction and purpose in steering economic growth after being hit by a series of scams. The open letter addressed to Prime Minister Manmohan Singh by a set of influential people from based in Mumbai and largely drawn from the corporate sector – calling themselves the Group – said the corporate-bureaucrat-power-broker nexus poses “one of the greatest threats to the Indian economy”. The letter, among whose signatories are Mr Azim Premji of Wipro, Mr Deepak Parekh of HDFC and Mr Narayan Vaghul, who is chairman emeritus of ICICI Bank, reflects the desperation of Indian industry at the atrocious manner in which the Government has handled the issue of corruption, sending wrongs signals to investors here and abroad and eventually harming economic growth and expansion.
To that gets added the remarks made by India’s wealthiest man and Reliance Industries Limited (RIL) chairman Mukesh Ambani. He joined the growing chorus of industry experts when he urged the Government to push through policy reforms that matched people’s growing aspirations. “The Indian Government needs to work at a faster pace”, Mr Ambani told delegates at the annual India Economic Summit organised by the World Economic Forum and Confederation of Indian Industry (CII) recently in Mumbai.
The policy stagnation which the UPA has perpetuated is reflected in Mr Ambani’s observation: “Just because we live in a democracy doesn’t mean that we should feel paralysed.”
These are not stray remarks by stray people but represent the opinion of the Indian corporate sector that is increasingly getting disillusioned with the Government’s inertia. The Government may believe that the corporate figures are looking at the situation from their perspective without appreciating the political and economic constraints that it has to function under, but the fact is that the UPA was until very recently the darling of the corporate sector and had apparently managed to put up a ‘dynamic’ show within the very same constraints that it is now holding as the culprit for the slowdown in its response.

Hit from all sides by Corporate India and in threat of losing out its most valuable support base after the aam admi – who, incidentally, is already preparing to cross over to any one else but the Congress and its allies – the UPA has hastily attempted to present a picture of a ‘Government in action’ by indicating that it would seriously consider allowing 51 per cent foreign direct investment in multi-brand retail and open up the civil aviation sector to investments (reportedly with a cap of 24 per cent to 26 per cent) by foreign airlines. The Union Cabinet has also cleared foreign direct investment with a cap of 26 per cent in the pension sector. The Government believes that these measures will reassure the corporate world about its ‘honourable intention’ in pursuing fast-paced reforms. And for those worried by mounting corruption and its impact on economic growth, the UPA is giving the final touches to a “strong Lokpal” legislation.

On any other occasion, such announcements and signals would have invited cheers from the corporate honchos. But they have not, because many of these measures, such as the establishment of Lokpal and permission for FDI in multi-brand retail, have been long overdue and the Government has dragged its foot on them. If it is acting now it is under pressure and not out of genuine conviction. In any case, the damage that has already been done due to the UPA Government’s mismanagement of the economy is of such proportion that it cannot be undone with a smattering of announcements. We have yet to see that ‘push’ which will take our economy to the next level – not of inflation or stagnation, but sustained high growth – and restore the confidence of Corporate India.

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