Thursday, May 31, 2012

The shocking GDP numbers can actually be a blessing….

When the GDP growth rate numbers came in yesterday, my first thought was that they would send shock waves throughout the financial markets. The BSE and NSE would crash. There would be anguished faces and worried looks amongst investors and industrialists. The trade bodies would come out holding their heads in their hands. The opposition’s knives would be out yet again. All that did happen, but in a rather muted manner.I was at an investors meet yesterday when the news came out, and was rather surprised when many (in fact, most) investors actually felt good that the GDP growth rates had come so low. Why?

Because they believed that unless things came to such a pass, the government would simply not react. It would continue to remain in deep freeze. It would continue blaming the Euro-zone crisis absolving itself of its responsibility. Some even felt that it would have been better if the GDP growth rate had gone further down to 4% and forex reserves were again down to just 2 weeks of imports. Only a crisis of this proportion would wake the government out of its stupor, so that a new set of reforms could be started….reforms that would help India’s economy for the next ten years.

What these people were saying is indeed true. Nothing in India ever moves until it is absolutely forced to. Nothing is ever fixed until it is completely broken. Since the UPA delivered a good GDP growth in its first avatar, it felt that it didn’t have anything more to do with the economy. The economy had already moved into a high growth orbit and it would take care of itself. The Congress thought that it could now afford to go back to playing politics. That’s when the problem started. The role of the government in any economy – even in a capitalistic one like the US – is critical. If the government goes to sleep, the economy comes to a grinding halt.

The good thing about terrible economic situations is that it forces governments to muster the courage to take bold decisions. In this particular case, the government needs to worry less about the BJP; more about Mamata Banerjee. Talk reforms – especially those concerning foreign investment – and Mamata starts kicking and screaming. If the Congress cannot find a way to handle Mamata – or sidelining her – then it will find itself unable to move ahead with its economic agenda. And if it doesn’t move, it will surely lose power in 2014. If anything, recent poll results have shown that people have very little patience for non-performing governments. As long as the economy chugs along, they are willing to tolerate the muck of inter-party politics. But the moment the economy slows down, they are happy to kick out the ruling dispensation. The one that has the most to lose at present is the Congress. And it would only be helping itself if it did something good now.

What needs to be done at this stage? In large parts, it is the sentiment that has started to hurt. Industrialists, bankers, investors, MNCs and domestic entrepreneurs have stopped believing in the Indian government, even though they still believe in the India story. It is true that India is still amongst the fastest growing developing countries (since the others too have taken a hit), but these people believe that there is no reason that India should have fallen so low. In fact, many believe that this was the time for India to have gone past China. If we had had good economic policies, our GDP growth wouldn’t have slowed down so much. By taking the excuse that the entire world is in crisis, the government can perhaps fool itself, but it cannot fool the people.

Is it already too late to make amends? I don’t think so. The government needs to signal that it is in control. Yesterday’s decision to allow exploitation of two mine blocks in the forest areas of MP was received well by the markets. The petrol price increase was a very good move nothwithstanding the bandh organized by the NDA. The government now has to increase diesel, kerosene and LPG prices – even if by a very small amount. Railway fare increases – notwithstanding what the economically illiterate Mamata may think so – are long overdue. We need to stop talking about GAAR at a time when the world’s investors are already in a worried and risk-averse mood. There is absolutely no need to victimize Vodafone and scare away many other investors. It’s still not too late. The government can undo the damage of the recent past, and then start to move forward again. The Congress has to understand this – that it itself is the most important reason for the mess that we have on our hands today.

It’s also time also for the BJP to recognize its key role in India’s growth story. The one reason why the economy grew so consistently between 1991 and 2011 was that there was a broad consensus between the BJP and the Congress on economic policies. There were no major reversals of Congress’s policies when the BJP took charge in 1998-99; nor when the Congress took over again in 2004. Investors loved this continuity. The two major parties fought on political issues; but were largely united on economic ones. Somewhere along the line – around the 2009 elections – the BJP felt that supporting the Congress wasn’t helping its cause. It probably knew in 2008 itself that it was going to lose the 2009 elections. That’s why it needlessly opposed the Indo-US nuclear deal. That’s when it started playing opportunistic politics. Not supporting FDI in multi-brand retail (when it was itself in favor of this earlier) or the GST (again, first supporting it and then not doing so) or the amendments to the Banking, Insurance and Pension sector (allowing far lower levels of FDI or voting rights) or Land Reforms Bill (recommending that the government should play no role in acquiring land for private industry) and so many other economic bills has ensured that reforms don’t take place. It may suit the BJP politically – and it surely must be wringing its hands in glee to see the Congress’s discomfiture – but it puts the country behind several notches. And as Advani and Ram Jethmalani have been saying, it is not helping the BJP either.

It’s time now for the Congress to act. Not acting is no solution, since that is sure death. There is no point being afraid. Maybe the Congress should remember the Mountain dew tagline “Dar ke aage jeet hai”! Acting boldly can still keep it in the race for 2014. Working with SP and BSP in UP – sacrificing its own political interests there for the time – may be a good starting point. Taking one tough decision a week may be a good thing to do. Sitting with the BJP on bills that it broadly supports cannot be a bad thing to do. Reining in its urge to splurge should be a mandatory survival tactic. And most importantly – listening to Manmohan Singh’s gyaan on economics may be the perfect solution!

The real truth is that the next few quarters will decide what happens to India. It could well recover strongly as it usually does after hitting a miserable bottom. Or it could go further down in an inexorable descent. It’s time to stop playing politics; its time to stand united. Its time to say no to Anna and the CAG; its time to say yes to reforms. We can do it….provided we want to do it…..

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