From 'Flight to Safety' to 'Flight to Stability'

Rama Krishna Vadlamudi vrk_100@yahoo.co.in

MUMBAI
May 17th, 2009

Nandan Nilekani described the Indian mandate as a ‘Flight to Stability’ after the incumbent Indian
coalition government has won nearly a comfortable majority in the Elections 2009 results of which
were announced on May 16, 2009. It is hoped that the country will get a stable government for
the next five years. This has brought lot optimism from the economy’s point of view. The road to
‘Flight to Stability’ was, of course, a challenging one. Only as recently as September/October
2008, India like the rest of the world had experienced a period of intense implosion following the
global financial meltdown leading the world to an abyss. Close on the heels of the crisis, Indian
financial markets have gone through a period of ‘flight to safety’ whereby market players have
embraced the so-called safe investments by paring down their risky portfolios. Now, the latest
mantra of stability seems to be the panacea braving the challenges being faced by India.

Let us see the broad contours of this verdict given by Indian voters:

All people who have predicted a more ‘fractured debate’ (including this author) in the
parliamentary elections have been proved wrong by the Indian voters

The country is likely to experience a relatively more stable government compared to the
previous coalition governments in the last two decades or so

Congress party has made big gains mainly at the cost of the Left parties, BJP and some
regional parties

Manmohan Singh seems to have earned good reputation among voters

Paradoxically, the communists in India have lost heavily in West Bengal and Kerala;
while the whole world has been embracing socialism and state control after the collapse
of unfettered free market fundamentalism in the US, Europe and other countries

BJP leader L K Advani has failed in his audacious bid to become prime minister

Regional parties led by opportunistic politicians like Lalu Prasad Yadav, Ram Vilas
Paswan, Chandrababu Naidu and Jayalalithaa are asked to sit on ‘benches’ for now

In the last five years, the UPA government appears to have ‘earned’ good public image through
its NREGS scheme, farm debt waiver and bringing in the Right to Information Act. Moreover, rural
people seem to be basking in the glory of higher incomes. However, it is obvious that the UPA
government during 2004-09 seemed to have escaped the wrath of the voters for its failure to
tackle several issues: job losses in the manufacturing/export sector, price rise (do not believe the
WPI inflation, look at the CPI inflation which is around 9%) in agri commodities that affected the
common people the most, farmers’ suicides across the nation, horrible internal security (have you
forgotten the bomb blasts at Bangalore, Ahmedabad, Hyderabad, Bombay, Delhi etc?), poor
natural disaster management (floods in Bihar and Bombay), killing PSU refineries, like IOC, BPCL
and HPCL, and meager record in the development of roads, ports and power sector.

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Rahul Gandhi: The ‘next Infosys’?

Indian voters have given Rahul Gandhi the status of a mid-cap stock, by promoting him from a
small-cap stock. He seems to have graduated to higher echelons after his apparent success in
Uttar Pradesh where congress party won substantial seats. Now, the question is can he grow to
become a large-cap stock on his own merit. There is, however, no dearth of congress leaders
including Manmohan Singh who sing the praises of Rahul and ‘thrust’ him to Himalayan heights
as if he is the ‘next Infosys.’ Unfortunately, many a time in the real world, obvious prospects for
growth do not translate into obvious profits (with due apologies to Benjamin Graham). Many
people hope that he can become a game-changer in Indian politics. Let us wait and watch.

“The Left is left out”: It is the latest catchphrase of Indian stock market. This pithy comment
from Bombay’s inveterate bull Rakesh Jhunjhunwala sums up the mood of Indian investors after
the 2009 mandate. Investors, led by FIIs, may buy into stocks heavily on Monday, the 18th of May
2009. Sensex may hit the upper circuit immediately after the market opening. Rupee also may
strengthen by up to four per cent on Monday and it may touch 45-46 in the next one or two
weeks. The prospect of a stable Central government is good news for the bond market. The hope
that the next government may push for disinvestment in a big way has fuelled speculation that
government’s borrowing may come down in the next one year if disinvestment of public sector
undertakings brings substantial money to the government’s kitty.

Congress party: Is it reformist?

Even though the congress party has emerged as the single largest party with more than 200
seats, it may not resort to any ‘big bang’ economic reforms that market players are expecting in
sectors, like, banking, disinvestment, insurance, pension, etc. If one sees its record over several
years, it is difficult to believe that congress party basically is reform-minded, except for a few
veterans, like, Manmohan Singh and P Chidambaram. Even during 1991-1993, it was forced to
adopt economic reforms due to the crisis thrown up in the aftermath of our forex reserves
reaching an abysmally low level of USD one billion just enough for two weeks of imports. During
2004-09, congress party has cleverly avoided economic reforms by blaming the communists
conveniently. Of course, the communists (except Buddhadeb Bhattacharya) have fought tooth
and nail in stalling reforms that would have brought long-term benefits to common people.

In fact, it was NDA government during 1998-2004 that brought a lot of reforms: bringing down
interest rates drastically, tax reforms, road development through golden quadrilateral and opening
up of telecom sector.

The bigger conundrum for UPA is that its second most dominant partner is the mercurial Mamta
Banerji’s Trinamool Congress; the party that had fought a bloody campaign against the Tata
Motors’ Singur plant in West Bengal and forced Ratan Tata to shift the ‘Nano’ plant to Gujarat. No
one will be surprised if she plays ‘red card’ for any reforms the congress party pushes for in the
UPA. If she really resorts to such blunt tactics, the communists will have the last laugh!

Perils of cheap populism

The biggest and immediate challenge for the government is the presentment of full budget for
2009-10. In the last one year, finances of the Central government have become messy and
unwieldy, with ballooning fiscal deficit – which is more than 11% for 2008-09, slowing economy,
falling tax collections and rising cost of populist schemes, like, NREGS, farm loan waiver and oil
subsidies. The problem with the congress party is that it firmly believes that these populist
schemes have won them the 2009 elections. As such, there is merit in expecting that the
congress will stick to its old path of cheap populism. Moreover, none should be deluded into
thinking that they will push heavily for disinvestment and such stuff; even in the absence of a
communist albatross around UPA’s neck. For decades, congress has hung on to power by
mastering the art of placating the masses by throwing crumbs/sops to them instead of
empowering them with opportunities.

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The Hope

India has shown a reasonably good growth over the last ten years in spite of various challenges
confronting the country. Whatever government was in power, they had tried to do some reforms
though in bits and pieces. And they have shown some consistency. Now, one hopes that the next
government may push for economic reforms though in a limited way.

The financial markets will be banking on the following reforms:

 Consolidation of public sector banks

 Further opening up of insurance sector

 Disinvestment through little chunks in PSUs

 Stimulating investment demand in the economy across all sectors

 Introduction of Goods and Services Tax (GST) with effect from April 1, 2010

 Stimulating/motivating Indian banks to lend to the needy sectors

With all-round optimism about a stable government at the Centre, forex flows in the forms of
foreign direct investment and foreign institutional investors may again knock at the door of India.
However, given the track record of governments, this optimism needs to be tempered with a little
caution. We need to be cautious because the world economy is still not out of the woods and the
world is besieged with protectionism in global trade. In addition, the Indian government needs to
do a fine balancing act in reconciling the Consolidated Fund of India.

Tailpiece:

THE HEIGHT OF SYCOPHANCY:

On May 16, 2009:

“He can claim the chair whenever he wants!”

-- Prithviraj Chavan, Congress leader meaning that Rahul Gandhi can

become prime minister at his own free will and timing

1970s:

“Indira is India; India is Indira!”

-- Dev Kant Barooah, a crony of Indira Gandhi

N.B: Old habits die hard for congressmen. Congress leaders are unfortunately showing their true colours.
Indira Gandhi’s arrogance during the 1970s led to her downfall in 1977. The congress party does not seem
to have learnt any lessons from the meanness of personality cult, sycophancy and cronyism.

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