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BW Businessworld

Commend, Don’t Exult

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After three years of priming all guns, taking careful aim and shooting both feet off, Prime Minister Manmohan Singh finally realised that a crippled man desperately needs some mojo to survive. So he showed the chutzpah which we all thought had been buried in the last thousand days.
The first move was to increase diesel price by Rs 5 per litre. It was an 11 per cent hike over the existing price — not enough to cover the losses on diesel which were then at Rs 18 per litre, but sufficient to have most political parties scream blue murder, with Mamata Banerjee being the shrillest of them all. The government has also chosen to limit the number of subsidised LPG cylinders to six per year per family. Any more will need to be bought at market prices, which reign at about 80 per cent higher than the subsidised price. That, too, got its usual ‘anti-common man’ hullabaloo, but less so than diesel.
Within 24 hours of the diesel and LPG announcement, the Cabinet Committee on Economic Affairs (CCEA) approved key FDI proposals. The most important was endorsing 51 per cent FDI in multi-brand retail. If you remember, the government tried to introduce this in 2011, but had to retract because of opposition from its allies, again led by the Luddite from West Bengal. This time, there was a cleverly enabling federalist twist — a clause which allows any individual state to opt out if it so wishes. There were other caveats as well: minimum investment of $100 million; stores allowed only in larger (one million plus) cities; and at least 30 per cent of the merchandise to be bought from small and medium enterprises. 
With at least half a dozen states expressing interest in FDI in retail, the process of finally having a modern retail chain is sure to begin. Its full benefits — often elaborated by global consulting firms — will take a while before kicking in. But its time has come.
The CCEA also allowed foreign airlines to own up to 49 per cent equity in India’s domestic air carriers, thus allowing Jet Airways, Indigo, SpiceJet, GoAir and perhaps even Kingfisher to now get extra risk capital, and reduce their leverage ratios. In addition, the CCEA increased FDI limits in FM broadcasting from 49 per cent to 74; and introduced FDI in power exchanges which, while forward thinking, has a long way to go.
That was not all. At long last the CCEA announced minority sale of shares of four public sector entities — NALCO, Oil India, Hindustan Copper and MMTC — which should raise about half of the government’s disinvestment target for 2012-13. 
Corporate India is overjoyed. After three years of reform neglect and two years of growth deterioration, there is a heady sense of “At last! Reforms are back!” This came out even stronger when Mamata pulled her Trinamool Congress out of the ruling coalition with 19 MPs in tow, and neither Singh nor Sonia Gandhi batted an eyelid. 
Mulayam Singh Yadav’s Samajwadi Party chose to back the coalition from outside, as did Mayawati’s Bahujan Samaj Party. I expect that there will be more goodies to be shared with the new ‘outside allies’, but an early election seems unlikely. Nobody wants it. None is prepared for it. 
A more important issue is our expectations. Long denied of even the most trivial of reforms, our fourth estate has gone ballistic in support. The endorsement is correct; but the ‘Singh is King’ extravagance is uncalled for at the first signs of reformist intent. 
Consider some facts. First, for fiscal year 2012-13, it is unlikely that GDP growth will be greater than 5.5 per cent. Second, while headline inflation is trending down, it is unlikely to reduce in the next three to six months to levels where the Reserve Bank of India will sharply cut repo and reverse-repo rates. As we saw recently, despite two consecutive days of reform announcements, the RBI didn’t budge. Third, finance minister P. Chidambaram will have to take tough measures to reduce the fiscal deficit in his budget on February 2013. With lower GDP growth and triple-digit crude oil prices, it is almost certain that the deficit will be higher in absolute as well as in relative terms. In his previous avatar, Chidambaram had the tailwind of 9 per cent growth. This time, it is 350 basis points less, and with a much higher deficit to boot.
The government has, at last, moved in the right direction.  But don’t get back to the bad habit where over-exuberant corporate honchos outbid each other in predicting double-digit rates of growth. As the title says: commend, don’t exult. 

The author is chairman of CERG Advisory. 


(This story was published in Businessworld Issue Dated 08-10-2012)