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BW Businessworld

Unravelling The Mess

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I must confess to feeling a certain sneaking sympathy for the prime minister. Here he is, the leader of the single largest party in Parliament with 206 members. He has a good understanding of economics, and has taken some economic decisions that were sorely needed at this time. But now the future of his government is in jeopardy because an ally with just 19 seats in Parliament and an extremely poor understanding of economics has pulled out. Even if the government survives with the help of some other allies, it is likely that the latter will demand their pounds of flesh – and the PM will probably have to make concessions that will be galling to him personally, apart from being bad for the central government coffers.

But to a large extent, the predicament the prime minister finds himself in today is of his own creation.  Before to we get to that though, a quick look at the decisions that are causing the government so much grief currently.

Despite the widespread protests from the left, the right and all manner of other parties against the measures announced by the central government, it is hard to argue that these were not necessary. India does not have vast reserves of petroleum, unlike a Saudi Arabia or a Venezuela. It pretty well buys almost the entire amount of oil it consumes from global sellers. And therefore, it cannot afford to subsidise diesel even while crude oil prices keep rising globally. If India’s economy were a bit stronger, and the government’s finances in a better shape, it could possibly have held on to the diesel prices for some more time. But even then, it would have been poor economics.

The same applies to its decision to cap the number of subsidised cooking gas cylinders that a family can get in a year. The difference between what the gas actually costs to produce and the price it is being sold for has been rising – again because of the rise in global crude prices. So beyond a point, the government simply cannot continue to give all cylinders at subsidised rates.

Regarding the announcements for foreign direct investment in aviation and retail, well there is no protest against the first one. Aviation is a lousy business and no party can claim that lots of Indian jobs will be lost if foreign investment comes into the airlines sector. In fact, given the current state of most Indian aviation companies, a fair amount of jobs will be saved if some of them get a few foreign investors.

The FDI in retail has become an emotive issue for most parties, and all these parties claim that big foreign retail chains will cause the loss of livelihood to thousands of small grocers. If that were true, then even the big domestic retail chains would have had the same effect – but no one has yet protested against setting up a Big Bazaar or a More or a Spencer's or any other big retail chain in their states. Moreover, organised retail – whether domestic or international – actually creates jobs, and also improves price realisation for many suppliers. It also could help in bringing retail inflation down – given that organised retail tends to sell most goods at more competitive prices than smaller shops. At any rate, the central government has left opening up of FDI in retail to individual states – so a state which feels strongly against it can always prevent the Walmarts of the world from setting up shops in their territories.

But if the prime minister feels that unreliable, temperamental and opportunistic allies are the sole cause of his problems, he is wrong. If he did a bit of soul searching, he would realise that he had the chance to do a world of good in a host of areas, without any interference from his allies, but he frittered away all his chances. In fact, if he had actually tried to do things properly, he would have been in a far stronger position currently – both in terms of image, as well as bargaining power.

Consider all the areas where the prime minister did not need support from Mamata, Mulayam or Mayawati. The first is the power sector. The power ministry has been headed mostly by Congress ministers in the past few years, and it is a sector crying out for some action. It also is one sector where it could probably count of support of allies if it tried to bring in FDI. Yet the government did nothing on the power front – even the states the Congress rules missed all deadlines when it came to improve power. Delhi is a prime case – despite being the capital and seat of power, and despite being ruled by the Congress government, it has not managed to build enough power stations to ensure uninterrupted supplies to its citizens. The Delhi chief minister had said that the state would be power-surplus before the Commonwealth Games were held. Two years post the games, Delhi still scrabbles to get enough power to meet peak demand in summers and winters.

Then take the case of roads. Again this is one ministry with a Congress minister. The country needs better highways, and improving roads in the country would do wonders to our economy. Petrol and diesel wastage would come down, which in turn would save precious foreign exchange and help strengthen the rupee. Wastage and spoilage of goods would be reduced. More importantly, roads dramatically change the economy of villages near them. This has been proven in study after study. Building good roads would give the kind of boost that the economy sorely needs. But the government just sat on the roads opportunity, shifting one minister out and brining another in, but without doing anything to accelerate road building in the country.

Then there was the UIDAI project which would have assigned a single identification number to each and every member of the country. This in turn was supposed to then help the government move to a direct transfer subsidy system, which would dramatically cut down the wastage in the current subsidy distribution methods. It is assumed that much of the money the government spends on welfare schemes is siphoned away by middlemen – one reason why the poor stay poor. Getting the UIDAI project right, and using it to ensure direct subsidies to the target groups would have both cut down the government spending on schemes such as NREGS and also improved the life of the poverty stricken. But the Congress allowed turf battles to take place between its own luminaries, and the initiative finally went nowhere.

Then there was also a chance to better monitor the NREGS schemes to make sure that some assets were really being created in the rural areas. But again, though millions have been spent, few assets which can actually improve the economy of rural India has been created.

Finally, there was the enormous amount of money siphoned away during the Commonwealth Games preparations. It happened right under the prime minister’s nose, and a prominent member of the Congress party was the lead actor in this drama. Again, the prime minister and his best ministers let this happen, even when there were enough warning signs and enough evidence that money was being stolen without infrastructure being built to the standards necessary.

Finally, there was the Coalgate scam and the 2G scandal. Sure the 2G ministry was headed by a A Raja from ally DMK. But there was nothing to prevent the prime minister and his cabinet from keeping a closer eye on how he was indulging in crony capitalism. Even if he couldn’t take a hard stance against a valuable ally, there was no excuse for the Coal block allocations to fairly dubious corporate entities. Surely, the prime minister needs to take the blame for not ensuring that the screening committee did a proper job of scrutinising recommendations before the blocks were actually handed out. The figures the CAG worked out in the coal scam might be fanciful, but no one can deny that several extremely shady companies did manage to get coal blocks along with some deserving ones.

If the prime minister had even focused on the sectors and ministries directly under the control of the Congress, and managed to ensure that these ministries performed transparently and efficiently, he could have taken a higher moral ground. He would also have improved the economic growth of the country even without having to lock horns with allies on steps such as FDI in retail. The prime minister and his colleagues from the Congress party are as responsible for their current problems as anyone else.