The Recognition of Good Governance by PM - VRK100 - 15Sep2012

Rama Krishna Vadlamudi, HYDERABAD   15 September 2012
www.ramakrishnavadlamudi.blogspot.com

            When the quick-tempered sage Durvasa entered sage Kanva’s hermitage; Shankuntala, the beautiful young lady, is in deep thoughts pining and day dreaming about her beloved husband, Dushyanta, the king of Hastinapura. Slighted by her absent-mindedness, sage Durvasa curses Shakuntala that her lover would forget her. At the end of this well-known story, Abhijnanashakuntalam*, written by renowned Sankrit poet Kalidasa, Durvasa’s curse is lifted as Dushyanta recognizes and embraces his wife Shakuntala upon seeing the ring he gifted her.

            India’s prime minister, Mr Manmohan Singh, seemed to have caught up in Durvasa’s curse for a considerable time, if not as long as King Dushyanta.

            At long last, Manmohan Singh seems to have woken up from a self-imposed curse and has come back to the centre-stage of governing the country once again by pushing through various reforms amidst raucous opposition from other political parties. In his earlier avatar as finance minister in the early 1990s, he loved economic reforms and brought in path-breaking decisions which have now put India on a pedestal in the international arena. He has earned good reputation for his personal honesty; and as an economist and RBI governor also.  

            But in his new avatar as India’s prime minister since 2004, he has given the impression that his government was a lame-duck government hemmed in from all sides by various controversies over misallocation of 2G spectrum and coal blocks; and various policy indecisions. Another impression was that he was protecting some powerful and dishonest ministers and not taking any collective responsibility for the actions and misdeeds of his government.

            Owing to his stony silence and inability to communicate with common people, the general perception is that he is at the helm only to serve the needs of the ruling Congress (I) party headed by Sonia Gandhi and ultimately it is expected that he would pass on the baton to Rahul Gandhi, son of Sonia and Rajiv (late) Gandhi. However, this is only in the realm of speculation.

(*Abhijnanashakuntalam is loosely translated as Recognition of Shakuntala)

Pushing for Economic Reforms

            India was racing like a gazelle posting record economic growth rates of 8 to 9 per cent between 2003-04 and 2007-08, but the gazelle was caught by a large Indian python of indecision, misallocation of natural resources, dithering and prevarication – constricting India’s economic growth rate, which has fallen to as low as 5.3 to 5.5 per cent in the recent two quarters.

            After a gap of almost two years, the self-imposed curse is lifted for the good of the country. And Manmohan Singh’s government has now recognized the importance of providing good governance to Indians. In the last few days, his government has taken a number of measures aimed at boosting India’s economic growth, controlling fiscal deficit and providing more jobs to the unemployed.

            On Thursday, the 13^th of September 2012, diesel price was increased by Rs 5 per liter (including taxes) aimed at slashing the fiscal deficit and reducing the burden on public sector oil marketing/upstream oil companies.

            The next day the government has decided to allow foreign direct investment (FDI) in multi-brand retail and civil aviation sector and enhanced the ceiling for foreign investment in broadcasting sector (see details below).

            The Manmohan Singh government received scathing criticism for almost two years for lack of economic reforms. Now, his government seems to be serious in reversing the perception. The PM himself described the latest decisions as:

“The Cabinet has taken many decisions today to bolster economic growth and make India a more attractive destination for foreign investment. I believe that these steps will help strengthen our growth process and generate employment in these difficult times. I urge all segments of public opinion to support the steps we have taken in national interest.”

A gist of cabinet’s decisions on 14 September 2012:

1. FDI In Multi-Brand Retail:

ü      Foreign Direct Investment of up to 51 per cent is now allowed in multi-brand retail (This decision was kept in abeyance since November 2011 in the face of opposition from various quarters)

ü      State Governments can allow setting up these retail outlets subject to state laws

ü      Such retail outlets can be set up only in cities with population of more than 10 lakh as per 2011 Census

ü      At least 50 per cent of the total FDI brought in must be spent in ‘backend infrastructure’ – within three years of the induction of FDI

2. FDI in Civil Aviation sector:

ü      Foreign airlines (existing policy allows only foreign investors other than airlines to invest in aviation sector) are now allowed to make FDI of up to 49 per cent in schedule and non-schedule airlines

ü      For example, British Airways can now invest in Kingfisher Airlines or Spicejet Airlines (not that the foreign airlines would find it attractive to invest in debt-ridden and loss-making Indian companies in the aviation sector)

ü      The 49 per cent limit would subsume FDI and FII investment

ü      Substantial ownership and effective control shall rest with Indian nationals

ü      The total FDI inflows into the air transport sector, during January, 2000 – April, 2012, were USD 434.75 million – which is just 0.25 percent of the total FDI inflows

3. FDI  in Power Trading Exchanges

ü      Foreign investment is now permitted up to 49 per cent (26% FDI & 23% FII limit)

ü      As per extant policy, FDI of up to 100 per cent in the power sector (except atomic energy) is already permitted

ü      As per extant policy, foreign investment of up to 49 per cent (26% FDI limit and 23% FII limit) is already permitted in stock exchanges and depositories

4. Review of FDI policy in Broadcasting sector:

ü      Foreign investment limit is now raised from the current 49 per cent to 74 per cent for companies operating in direct to home (DTH), teleports and cable networks

ü      Foreign investment of up to 74 per cent is now permitted in Mobile TV

5. Disinvestment of 9 to 12 per cent is permitted in four public sector companies, namely, Hindustan Copper, MMTC Ltd, Oil India, and National Aluminium Company.

Support for Reforms

            As described by the prime minister, these decisions are to be welcomed by all people, no doubt. For example, the diesel subsidy burden is taking a heavy toll on companies, like, BPCL, HPCL, IOC, ONGC, GAIL and Oil India. These companies are unable to invest, at the desired level, in new capacities or explorations. This has negatively impacted the nation’s energy security in the last nine years. Just consider the total loss suffered by BPCL, HPCL and IOC for the April-June 2012 quarter – it’s a staggering Rs 40,500 crore!

            The people need to ask who is providing for these subsidies and from whose pockets the subsidies are recovered. The truth is that the government is giving from one hand and taking away the benefit from another hand and the net result is zero benefit to common people. We need to understand this basic reality.

To know more about the oil subsidy burden, just click: http://ramakrishnavadlamudi.blogspot.in/2010/02/oil-subsidy-burden-why-kirit-parikh.html

The Case for FDI in multi-brand retail sector

            As per the latest FDI policy, respective state governments are vested with powers to give licenses to companies that want to bring in FDI in multi-brand retail outlets. The central government’s decision to allow FDI is enabling provision for state governments to act. If a specific state government is not comfortable with central government’s FDI policy, the state government is free to not allow such outlets.

            But one important point to note here is that in the last decade, most of the state governments have been competing with one another to attract capital investments to their own states by providing a number of incentives. Gujarat, Maharashtra, Karnataka and Tamil Nadu state governments are in the forefront to entice large companies of late. So, competition may force majority of states to allow FDI in multi-brand retail outlets.

            India is hungry for capital as it is deficient in it. Foreign investment, mainly foreign direct investment or FDI, helps the country in generating employment, providing innovation and ushering in new products for consumers.

            As part of the new policy, a lot of investments will be made in the back-end infrastructure, which includes, investment in processing, manufacturing, distribution, design improvement, quality control, packaging, transport, logistics, storage, ware-house, agriculture market produce infrastructure; excluding investments on front-end units.

            Without any doubt, the new FDI policy on multi-brand retail outlets will be beneficial to farmers as well as consumers.

Is there any flipside to FDI in retail?

            Yes, there will be some negatives. We need to prepare ourselves for some small sacrifices for the sake of greater good.  India is evolving and we need to welcome a lot of changes. Some opposition parties, especially the Bharatiya Janata Party, are giving the impression that this new policy will result in loss of livelihood for millions of people. This is a blatant lie on the part of BJP and other parties. It is very clear that BJP is opposing the government’s policy just for the sake of opposition. The party is resorting to a disinformation campaign.

            When computerization was introduced in the banking sector, there was a huge opposition to it. Computerization has not resulted in job losses. The sons of trade union leaders who stridently opposed bank computerization have now been working in large multi-national IT companies! The trade union leaders just bluffed the nation at that time.

What are the political ramifications?

           

            The ruling Congress (I) party seems to have taken a calculated risk – they may have consulted some of their allies before pushing for economic reforms. Or, the ruling party may be thinking enough is enough. Mamata Banerji, chief minister of West Bengal, expects some economic revival package for West Bengal and so is Uttar Pradesh state government led by Samajwadi Party. May be, the central government will appease the allies through certain measures. It is hoped the present UPA government will last its full term till 2014. But watch out!

Conclusion

            Real foreign investment, however, will take some more time to come. It may take as long as six quarters to two years for actual setting up of multi-brand retail outlets in India. Because the companies have to get a lot of approvals and various conditions are attached to the policies. We need to be realistic about this.

            Diesel price increase of Rs 5 per liter is only symbolic as it would not bring down the fiscal deficit considerably. However, it needs to be grudgingly accepted that some times symbolism or tokenism helps to some extent.

            At long last, the central government seems to have woken up from the deep slumber by pushing for economic reforms. The government’s policies for allowing FDI in multi-brand retail and civil aviation sectors and raising diesel prices are to be welcomed wholeheartedly. Some of these are enabling provisions for attracting foreign investment to Indian shores. These measures will definitely enhance India’s attractiveness for foreign investors.

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Notes: FDI          – Foreign Direct Investment; FII               – Foreign Institutional Investors and RBI – Reserve Bank of India. Hastinapura of yesteryears is considered to be modern Delhi.

Disclaimer: This should not be construed as a recommendation by the author. The author has a vested interest in the stock market going up. The views of the author are personal and he changes his views on the market and economy very quickly depending on various factors. Readers or investors must consult their certified financial advisors before taking any decision on their investments.