PM gets down to serious business…..there could be no better time

The Economic Times carries a story that the PM has gotten down to dirtying his hands with respect to the economy. Economics remains the PM’s forte and his involvement is bound to remove the policy freeze that has gripped his government for the last year and more. There are also several other factors that should help him now. There could not possibly be another time as opportune as this.

Let’s first look at the economic factors that are giving some degree of confidence to the PM. The inflation has finally started cooling off, the January number being around 6.5%. Now while that is gratifying, it must be remembered that the low number benefits from the high base of last year’s price level. Hopefully this tapering of inflation will be followed by some interest rate cuts by the RBI which is really the trigger that industry is looking for. Industrial growth has slumped to less than 2% recently, and a rate cut could well provide the necessary kick. The market has already factored the rate cut probability in its calculations – if the Purchase Manager’s Index (PMI) rising to a high level of 57.6 odd in January is anything to go by. A high PMI indicates confidence of the manufacturing sector about expansion.

Let’s also look at the other issue that led to the freeze in the first place. The series of scams. Well, the government may have been spooked by the SC on the cancellation of 2G licenses, but apart from that, there has been nothing but a slew of good news. The trial court refused to indict Chidambaram and more than this fact, the reasoning the court gave must have been heartening to the Congress. The Antrix “scam” has more or less ended with it now becoming clear that the CAG had grossly overestimated the loss to the exchequer. Forget Rs 2 lac crores….what is now being doubted is if there has been any loss at all. The S-band spectrum is simply not comparable with the 2G or 3G telecom spectrum. Further, the PMO and the PM personally have been completely exonerated. If anything, the lapses happened at the end of the ISRO scientists. And finally, the General VK Singh brouhaha with the government has also ended in a huge anticlimax. The SC refused to even entertain the General’s plea contending that he had not been made a victim. Even the SC cancellation of the 2G licenses only indicates that the allotment of licenses was improper in law – the FCFS policy earning the wrath of the court. It refuses to indict anyone in the Congress. If anything, it looks more certain now that Raja alone will be charged with the conspiracy.

And finally the political scenario seems to be improving for the Congress. The Star News poll suggested that the Congress was likely to do well in UP. Suddenly, the opposition has changed its tune from saying that “the Congress will be buried” or some such thing to “even if the Congress crosses 50, it cannot be said that it has done well”. The change in tune is important because it was the opposition that posed the UP elections as a test of Rahul Gandhi’s capability to lead his party. If the results come good, Rahul would have proved himself. Not only in UP, the Congress is expected to do well in Punjab and Uttarakhand also. Lastly, there is a widespread belief that the Congress-NCP alliance will win the BMC elections handsomely in Mumbai. Will political victories give the Congress confidence to get out of the pit it finds itself in? It should….unless the party messes up again elsewhere.

There is a lot of work that needs to be done. But first and foremost, it’s important to settle the 2G auction issue amicably. One of the possibilities could be that the government returns the license fees already collected from the new telcos in 2008 and then limits the auctions that follow to only the new players. As the Uninor CEO said….the government’s objective in 2008 was to allow more competition so that consumers benefitted. If that objective hasn’t changed, then the auctions must keep out the older telcos. If that happens, the likes of Uninor, MTS and others would be back in business in a few months. However, the older telcos are not going to accept this. They too are starved of spectrum and would like to participate. They have more financial resources and if they win the bids, what happens to the thousands of crores of investments the new players have put in? There is significant amount of diplomatic pressure also that Russia in particular is likely to put on India. Given the fact that the new telcos did nothing wrong by following the government policy of the day, I feel it would only be fair that the government limited the auctions to them first. It’s a sticky situation and will prove to be a difficult one to solve.

The stock markets are up – almost in anticipation of business returning to normal. With the rupee also strengthening and returning to the sub-50 level, it makes sense for FIIs to return back to the Indian markets. With the government planning some big ticket dis-investments, there could be enough opportunity for the Indian bourses to get back into a bull phase again.  What’s worrying however is that capital receipts from a disinvestment exercise will end up funding populist revenue expenses. This is suicidal and very bad economics. What needs to be done of course is for disinvestment proceeds to be deployed into infrastructure development. If the Congress does do well in the state elections, it will be further encouraged to pursue financial profligacy.

The real truth is that it’s a good time for us to move away from politics and focus on getting the work done. For one reason or the other, the UPA has been on the backfoot for long. But just like one MS – Mahendra Singh (Dhoni) – has shown resilience and signs of bouncing back, it’s time now for the other MS – Manmohan Singh – to do the same. The PM won’t get a better time politically to move ahead….