THE spectacular spike in the stock markets sums up corporate India’s glee at the ascension of Narendra Modi as Prime Minister. But it also brings back decade-old memories of the Bharatiya Janata Party’s India Shining campaign, after which it was out of office for 10 years. Quite apart from worries about the socially divisive agenda of the party that leads the new government, there are questions about how it will choose to address the needs of an economy that has not only been slowing but is plagued by inflation, especially the inflation of the prices of the bare essentials of life. What does the India Shining experience teach one while looking for clues about the new government’s policy direction?
Captains of industry and corporate lobbies have phrased their euphoric expectations from the Modi government in three key expressions—that it will be “quick” and “decisive” and will boost “investor sentiment” in addressing the needs of the economy. Sceptics would argue that these expressions are nothing but shorthand for a more pronounced bias of the new government for industry than the United Progressive Alliance’s (UPA). The expectation is that the “policy paralysis” of the previous regime will be replaced by active intervention that will facilitate quicker clearances for projects, which, ironically, actually implies greater deregulation. The implication is that the government would “facilitate” quicker land transfers, faster environmental clearances and clear other hurdles that industry claims have delayed projects. The mood swing that investors exhibited immediately after the election results started streaming in—which took the Bombay Stock Exchange’s Sensex beyond the 25,000 mark—definitely conveyed the impression that they took to heart the BJP’s poll jingle ache din aane wale hain (good times are just round the corner).
But is the slowdown just a matter of investors being in a depressed mood? The sharp increase in the inflow of foreign capital in the past few months, which has resulted in the rupee rising to its highest level against the dollar in almost a year, is surely a cushion that provides a measure of comfort to the government in handling its deficit in the current account. But that could quickly become a bed of thorns, given the caprices of investors, especially those who come in the garb of foreign institutional investors (FII). More significantly, the inflow—and the ever-looming possibility of quick and sharp outflows—offers foreign investors leverage to pressure the government on its choice of economic policies.
Possible contradictions The pursuit of such a course, quite apart from posing the danger of whittling down Modi’s carefully cultivated image of a strongman, also has the potential to heighten the contradictions within the platform that has won the BJP a historic mandate. An area of potential tension is foreign direct investment (FDI) in the retail sector. In a clear attempt at wooing the trading community, the BJP made a clear and unqualified election promise to reverse the UPA government’s decision to allow FDI in multi-brand retail. Indeed, in sharp contrast to most industry bodies that refrained from openly identifying themselves with the BJP during the election campaign, the Confederation of All India Traders (CAIT) openly declared its support for a Modi-led government. But a party that has not had any serious differences with the Congress on economic liberalisation policies would find it extremely difficult to stand its ground, especially if and when a crisis develops on the foreign exchange front.
In short, as the government runs out of options, it may be forced to forsake elements that were a crucial part of its social support base in the run-up to its spectacular triumph. A case in point is the issue of fiscal deficit, the running up of which is a strict no-no in the BJP’s handbook of economic policy. Increasing the fiscal deficit to run schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) and a functioning public distribution system or even to fund rural and industrial infrastructure projects as a countercyclical measure to arrest the slowdown may well be ruled out on ideological grounds. This option becomes even more critical given corporate India’s strident and vocal opposition to higher taxes. But even if the government were to be somehow moved to provide relief to people, the combined weight of international rating agencies and global banks, foreign investors and industry would put enormous pressure on it to refrain from pursuing such a course. In this scheme of things, investors and their mood counts for everything.
But these are yet policy options that the government may well be forced not to pursue. In order to get a measure of what can surely be expected from this government, we merely have to turn to what happened during India Shining version 1.0. The aggressive and controversial wave of privatisation unleashed by the National Democratic Alliance (NDA) government under the leadership of Atal Bihari Vajpayee, in the name of “strategic sales”, was unsurpassed even during the worst phase of the scam-ridden tenure of the UPA.
Selling public assets
Privatisation, or the throwing away of public assets at bargain prices to sections of big business, enables such entities to increase their monopoly power in key industrial segments. Moreover, acquisition of assets by this means boosts their asset base in a manner that would not have been otherwise possible given the economic slowdown. Remember the Balco case, which resulted in the outright sale of one of India’s premier aluminium manufacturing companies in 2001 by the NDA? A similar fate may well await a host of Indian publicly owned companies ranging from the national carrier Air India to the oil companies.
But this would not be all. A similar—or possibly worse—fate awaits the public sector banks and insurance companies. The public sector banks have been burdened by the massive build-up of non-performing assets (a euphemism for bad loans) on their portfolios in the last few years, thanks to the extreme extents to which Indian corporates have leveraged their balance sheets. Recapitalising the banks has become an emergent issue in this context. A government that is unwilling to extend funding for this purpose may well be inclined to use “innovative” options that could potentially weaken the banks while setting up their eventual sale to private (read foreign) entities. Privatisation, seen from this perspective, would be used as a means to pumping up a fresh bubble, which would result in enormous gains for a few at the expense of many. Indian industry, which had borrowed heavily in the last few years—net bank credit to the private corporate sector has surpassed net bank credit to government since 2006-07—recognises that its access to cheap bank credit is well and truly over. Growth through aggrandisement is thus an opportunity to overcome this hurdle. But these options have much wider ramifications and mean much more than the sale of assets that ordinary people do not readily recognise. For example, one of the key issues before the new government would be approval of the doubling of the price at which Reliance Industries, the biggest Indian corporate unit from the Mukesh Ambani empire, would be allowed to sell from the Krishna-Godavari fields. A cascading effect on prices of fertilizers and power would be the immediate consequence of increasing the gas price.
Another key issue that might bring the government under pressure from the hefty corporate lobby would be the land acquisition legislation. Modi, with his considerable experience at having “expedited” projects in his own State of Gujarat in the face of resistance from landowners, may well be tempted to replicate this on a wider scale. Of course, this has the potential to create significant unrest and an erosion of the ruling coalition’s support base.
Ending a social compact
The steady and relentless pursuit of economic reforms by various governments in the last two decades may give the illusion of uniformity—that there is no real difference in the agendas of various parties. But there is one notable difference between the rest and the BJP and its ideological fountainhead, the Rashtriya Swayamsewak Sangh (RSS). The BJP is different from the Congress and other political parties in that it does not carry the historical legacy of a social compact that has imposed a limit on what the state could do in the economic realm even if it is acting in favour of the rich. Of course, the compact has been fraying ever since liberalisation, but the crucial difference lies in the fact that the BJP never had this legacy to hinder its pursuit of full-blown and brazen intervention in favour of private capital. That is the danger posed by the brand new version of India Shining.
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