India's politics rule - economy be
damned By Swati Lodh Kundu
NEW DELHI - As the political circus plays
out in India with a new twist at every turn, it
brings about a sense of deja vu. The past weekend
brought a burst of euphoria over a trickle of
reform, as the politically challenged government
led by Prime Minister Manmohan Singh finally
gathered courage to announce a much-awaited
increase in the price of diesel. The trickle
quickly turned into a deluge, with an announcement
that foreign direct investment (FDI) would be
allowed in the multi-brand retail and aviation
sectors.
Joy quickly gave way to a sense
of resignation as the recalcitrant ally of the
ruling United Progressive Alliance (UPA) coalition
government (the Trinamool Congress, or TMC)
decided to pull the plug - Mamata Banerjee, the
firebrand leader of the West Bengal-based TMC
announced that it would be withdrawing support from
the UPA government over
the changes.
The announcement came after
the government ignored TMC's demands to roll back
both the diesel price increase and the FDI
liberalization that Indian cabinet committees
approved last week. Suddenly, the threat of
mid-term elections loom and the ability of the
government to take the next reformist measure are
severely questioned again - the next general
election has to be held in 2014 at the latest.
With 19 seats in the Lok Sabha, or
parliament, the TMC is the second-largest
constituent after the Congress party (which has
won 206 seats) in the 12-member UPA which was
re-elected in 2009. It is imperative to note here
that, despite India's deteriorating economy and
the threat of a ratings downgrade, the TMC has
steadfastly opposed all cuts in fuel subsidies as
well as FDI liberalization, forcing the government
last December to suspend its decision to allow 51%
FDI in multi-brand retail.
While the
Indian economy is growing despite the government,
the fact is the government continues to play an
important role. The most important aspect of this
came to the fore during early 1991, when efforts
were started to reform the then crisis-ridden
economy.
As the economy opened up, it
unleashed a tremendous force that was waiting to
explode as the energy bottled up over decades of
severe restrictions imposed by governments of the
day was released. For the first time, the private
sector got to play a constructive role with a
relatively level playing field. Suddenly, India's
potential growth rate shot up well beyond the so
called "Hindu growth rate" of 4%. The economy has
now reached a potential where any growth below 6%
is considered a disaster.
However, all the
low-hanging fruits of the first wave of reforms
have been plucked. India now desperately needs a
second bout of reform that can fire up the
manufacturing and related sectors. This is an
essential prerequisite for India to earn the
demographic dividend that should come with a young
population and the ability to pull a majority of
the population out of agriculture - a sector that
at present gives work to nearly 55% of the
population but contributes only 14% of gross
domestic product.
Unfortunately, as India
moved from single-party rule to coalition
government (with increasing numbers of regional
political parties playing a crucial role in
propping it up), the focus of the politicians has
moved from long-term to being abominably
short-term.
With the aim of staying
relevant for their constituencies so that they can
be re-elected in the next term, the focus is
increasingly on undertaking populist measures
which leads to immediate gratification. Hence we
see measures such as under-pricing of resources
like water and electricity; debt-waiver schemes
that ignore the issue of moral hazard; subsidies
on various petro products ... the list is, in
fact, endless.
Readers would do well to
remember that it is this very TMC chief who forced
the resignation of her own colleague (Dinesh
Trivedi), who as a railway minister, wanted to
raise the rail passenger fares by a bare minimum
to bring some semblance of stability of railway
finance (which is now tottering on the brink of
disaster).
The TMC chief wants to be seen
as a messiah of the poor, finance permitting or
not, and hence opposes the diesel price increase
because it is considered anti-poor. She wants to
play with mass hysteria and talk about the
potential loss of employment opportunities of mom
and pop shops if FDI in multi-brand retail is
allowed - ignoring the fact that these very shops
survived and even thrived despite the so-called
onslaught of the retail majors of the domestic
variety.
She ignores the benefits FDI in
retail can bring - better efficiency (remember
India is notorious for the post-harvest loss of
food grains, fruits and vegetables due to a severe
lack of adequate storage facilities), lower prices
(as layers of middlemen may become redundant and
hence benefit the ultimate consumers), and the
creation of a plethora of jobs (according to a
report by the Indian Staffing Federation, an
industry body representing the flexible staffing
sector.
FDI in retail can create around 4
million direct jobs and almost 5 to 6 million
indirect jobs, including contractual employment
within a span of 10 years.
Clearly, the
long-term sustainability of the economy is at
stake, as the politics of policy making holds
rational decisions to ransom.
Swati
Lodh Kundu is a New Delhi-based
commentator.
(Copyright 2012 Asia
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