Time of economic troubles

The situation of generalised gloom in the Indian economy, as manifested on several fronts, spells further trouble for the NDA.

NEVER a favourite with the right-wing fraternity that he has chosen to co-habit with, Finance Minister Yashwant Sinha's credibility has taken a number of knocks in recent times. Clearly, the mess with the Unit Trust of India (UTI) is only one of the manifestations of a wider crisis of economic policy. And as he sets out to grapple with the realities of an economy that seems to be hurtling towards recession, his tenuous relations with the hardline elements of the Bharatiya Janata Party are likely to fray further. In the bargain, he is likely to test Prime Minister Atal Behari Vajpayee's often articulated personal belief about his suitability for the job. And on a wider terrain, the whole constituency for economic liberalisation is likely to be put through a severe test of its commitments.

In just over three years of indifferent and unimaginative stewardship of the Finance Ministry, Yashwant Sinha has managed to present just one Budget that actually won the applause of the special interest groups he was anxious to please. That was his most recent effort, which managed to stitch together a set of major concessions for the stock markets that engendered a brief flutter of speculative excitement. But the short-lived bull market collapsed under the accumulated weight of speculative excess, malfeasance and official collusion. And it then seemed just a matter of time before the wider effects would begin to ripple through the economy. The situation of generalised gloom in the economy is of course reflective of a malaise much deeper than that afflicting the stock markets. But a policy dispensation that was premised upon the well-being of the stock markets today faces the moment of reckoning.

The UTI crisis was the first manifestation. The cycle of boom and bust in the capital markets has burnt deep holes in individual pockets and claimed a number of financial institutions as casualties. The Bank of Karad went into liquidation in 1992 after its last reserves were squeezed out in the speculative contests between Harshad Mehta and the Dalals, Hiten and Bhupen. A disturbingly similar pattern - suggestive of regulatory negligence or worse - is evident in the Mercantile Cooperative Bank, which early this year fell victim to Ketan Parekh's trial of strength against a newer and more updated version of the bear cartel. These cases, however, are dwarfed by the potential dimensions of the UTI crisis. First, the UTI is the country's largest mutual fund, with a legacy of responsible investment decisions that accord the topmost priority to security and solvency. Secondly, the UTI disposes of the savings of the large and politically voluble middle class. Yashwant Sinha's self-extenuating alibis follow a familiar pattern. As several of his ministerial colleagues have been doing in recent times, he argued that he inherited a problem from previous governments which he had been trying his best to remedy. But circumstances beyond his control rendered his task that much more difficult. The gradual transformation of the UTI's portfolio from debt to equity had been accomplished before he came to the Finance Ministry, engendering a high degree of uncertainty for the security of unit-holders' funds. He had been, in line with the recommendations of an expert panel, seeking to restore the predominance of debt instruments in the UTI's pattern of asset holdings, but this process had to be a gradual one, since it could otherwise destabilise the stock markets. The quite unexpected slump in equity values, however, had pre-empted the process, causing a gaping hole in the UTI's assets structure.

This is not by any means the only crisis in the financial sector that awaits an emergency repair job. Certain of the large term-lending institutions, notably the Industrial Finance Corporation of India (IFCI), are known to be reaching the end of their tether, and may not be able to keep on papering over their financial exposure in a number of troubled industries. The Industrial Development Bank of India (IDBI) is also known to be facing the prospect of turbulence over the far from rosy outlook for the steel industry, where it has major stakes. Add to this list the state of the country's public sector banks, many of which need infusions of capital to meet basic stability norms, and the full range of the demands on the Finance Minister's meagre resources would be evident.

It does not help that the deterioration in the health of vital financial institutions coincides with a sharp accentuation of the fiscal crisis of the Union government in a context of global economic slowdown. Figures that have recently been released point to a sharp fall in revenues accruing to the Central government in the first four months of this financial year, and a dramatic surge in expenditure. Reasonable estimates of the course of public finances indicate that if current trends persist, the fiscal deficit could well end up near the double-digit mark as a proportion of gross domestic product, against Yashwant Sinha's calculation of 4.7 per cent.

The evident deterioration in the fiscal situation was the principal criterion used by three rating agencies - Standard and Poor's, Moody's and Fitch - in their virtually concurrent decisions to downgrade India's ratings in the global credit market. The agencies placed the weak budgetary figures in the context of the evident lack of political consensus on the future directions of economic reforms. Despite his long-professed intention, the Finance Minister has not yet been able to obtain broad-based political consent for his fiscal responsibility bill. And the privatisation process, which was designed to redress some of the growing pressure on the fiscal apparatus, shows no signs of taking off. The few public sector disinvestment decisions that have been pushed through, have run into serious political flak. The newer proposals continue to be jealously contested between different ministries.

The strategy of identifying strategic partners for taking on the equity in key public sector units is clearly in trouble, with the consortium comprising Tata Industries and Singapore International Airlines recently indicating that it may not be keen to take up a stake in Air-India. The nationalised air carrier faces a situation that is common in the Indian public sector - ever since disinvestment became a policy option, it has suffered from a serious investment famine. Performance parameters have deteriorated, but as long as the stock markets remained buoyant there was a hope that a reasonable price could be realised on their equity sale. But now with the equity markets in free fall, the legacy of many years of neglect of the public sector is returning to haunt the advocates of disinvestment. Arun Shourie, Minister of State for Disinvestment, recently gave vent to his frustrations over the faltering pace of public sector equity sale. With the fiscal deficit burgeoning, it is clear that the fire sale of public sector equity is the only feasible option of restoring a semblance of order to government finances, he argues. Failure to pursue this option would compel India in the near future to go to the International Monetary Fund (IMF) for an emergency infusion of funds. That, says Shourie, could prove expensive for the country in political and strategic terms. The West, he warns ominously, has yet not forgiven India for the Pokhran nuclear tests of 1998, and will extract a high price for IMF assistance. In this sense, the delay in the disinvestment programme, is in Shourie's view, the best that those who bear no goodwill for the country could have wished upon it.

This monitory outburst from the Minister for Disinvestment suffers from a certain credibility problem. If the precedent of Bharat Aluminium Corporation (Balco) is any indication, then the disinvestment target of Rs.10,000 crores for this year would require the sale of controlling stakes in several of the most valuable public sector undertakings. Considering that the sale of a controlling stake in Balco fetched the government the derisory sum of Rs.550 crores, the target for the current financial year involves, as certain Opposition members warned when the Budget was presented, virtually a Balco every fortnight. But rather than attend to the serious business of building a political consensus on the methods of valuation to be adopted in pricing public sector equity - which is an issue on which serious discord exists - the Minister for Disinvestment has been proceeding on a confrontational path, impugning the knowledge and the commitment of anybody who raises uncomfortable questions.

This has not been a strategy designed to win adherents to the cause of privatisation. Expectedly, if Air-India is stuck in the mire, disinvestment programmes in other major public sector units - Maruti Udyog Ltd., Videsh Sanchar Nigam Ltd., Indian Airlines Ltd. and Hindustan Organic Chemicals Ltd. - are yet to get off the ground. And even if the political miracle is wrought and some progress achieved in these sales, the expected maximum realisation from privatisation remains a tiny fraction of the dimensions of the fiscal deficit.

The economic troubles besetting the National Democratic Alliance government and threatening to tear it asunder are considerably accentuated by the bleak international situation. The U.S., which has been the sole engine driving the world economy over much of the last decade, is now officially recognised to be in slowdown mode. The dread word "recession" is not far from making its appearance in official prognostications on the economy. The implications for India are already manifest - against an export growth rate of nearly 20 per cent in the last quarter of the past year, this year has witnessed a mere 5 per cent growth. And even if imports have also been moderate on account of the slackening of domestic demand, essentials such as petroleum continue to demand large outlays. The one zone of comfort that Yashwant Sinha can today count on is the external sector. Reacting angrily to the downgrade by international credit rating agencies, he had pointed to the external reserves position as an index of India's relatively stable prospects for the future. But these reserves have been partly built by assuring foreign institutional investors the rights of free entry and exit from the country's stock markets. And with equity prices in the state they are in, the institutional investors may well be tempted in the next few months to take their business elsewhere. Yashwant Sinha's ability to prime the domestic markets is restricted by the parlous situation in which the country's own financial institutions find themselves.

As the Indian economy finds itself on the verge of meltdown, the resentments against the Finance Minister and other partisans of liberalisation in the government are likely to boil over. The recent decision to expand the scope of the Joint Parliamentary Committee inquiry into the stock market scam of April, to take in the mess in the UTI, is an undoubted setback for Yashwant Sinha. More could be in store as the JPC inquiry begins uncovering specific details of the sequence of decisions that brought the UTI to its current state. In particular, the trail of questionable decisions regarding investment in information technology companies could lead uncomfortably close to very influential persons in the NDA government.

In 1991, when the country faced a difficult situation on the external payments front, partisans of economic liberalisation succeeded in foisting a new consensus within the elite - that a crisis of solvency was indeed a crisis of development itself and that an entirely new framework was necessary for economic policy, failing which the country would continue to falter without any sense of direction. The dire warnings then had the distinct overtones of hyperbole and they were buttressed by visions of the country's gold reserves being furtively sent abroad to back up emergency borrowings. But a decade on, the overblown rhetoric of 1991 has acquired the character of a self-fulfilling prophecy. Having embarked upon a course of economic restructuring based on a narrow constituency of finance capital, the decade of liberalisation has succeeded in transforming a crisis of solvency into an actual crisis of development. And irrespective of where culpability should rightly be ascribed, the government of the day is likely to bear the full brunt of public fury for the state of the economy.