Opinion Staring at last chances
There is a sudden upturn in economic sentiment. Centre must seize the moment
Mass psychology plays a very big role in determining the shape of the political economy. If economic agents,such as producers and consumers,start believing things are turning for the worse,indeed they do start becoming worse. This has broadly been the case with India over the past year and more. A combination of circumstances a virtual paralysis of domestic governance and the rapidly worsening economic prospects in the West - has created a somewhat depressed sentiment in the local political economy. However,it is equally true that bad news also has a natural cycle of playing itself out. One view is that the political opposition against UPA 2 may have peaked too early. Hereafter things may get better simply because it possibly cant get any worse! Of course,the government will have to start doing something substantive for this to happen.
Whatever the nature of their mandate,many governments go through a serious mid-life crisis,but what differentiates one from the other is how it handles the challenge. Even the Rajiv Gandhi government,with a 400-plus presence in Lok Sabha,had suffered one. However,UPA 2 has been somewhat unique because it suffered a series of early-life crises like no other government possibly did. This happened partly because there were many contentious issues which had spilled over from UPA 1. For instance,the telecom scam had already acquired some momentum at the end of UPA 1 and had simply got stoked when A. Raja was reappointed minister for telecommunications. In fact,UPA 2 started on a controversial note when it became public that Prime Minister Manmohan Singh had opposed Rajas reappointment as telecom minister. The rest,as they say,is history.
Since UPA 2 was afflicted by early crises,it may appear to have time on its side. Earlier,governments would face a serious crisis during mid-term typically in the third year and the momentum of political opposition would normally carry through till the year of the general election. In the present instance,however,this is not likely to happen as the general elections are still two-and-a-half years away.
The UPA has a lot of time to address issues that may snowball into bigger political controversies at a later stage. Some of these potentially disruptive issues may get sorted out in their natural life cycle. For instance,the problem of persistently high inflation is likely to get resolved over the next few months. There was a visible change for the better in economic sentiment when the RBI and the finance ministry gave a guidance that inflation is likely to taper off to 7 per cent by March-end from close to 10 per cent today.
Manmohan Singh is personally under attack from the opposition for economic mismanagement as inflation remains close to 10 per cent and GDP growth has tapered off from 9.5 per cent to 7.7 per cent in a matter of 20 months after the UPA returned to power. So his government is having to offer an explanation on both counts why is growth so down and inflation up?
However,the silver lining appeared last fortnight in the form of the central bank giving a guidance that inflation was possibly tapering off and consequently there will be a pause in the cycle of hike in interest rates. This news was widely welcomed by both producers and consumers who had watched interest rates increase 13 times in the past 20 months. The middle-class borrowers of home loans had been particularly affected as their loan tenures were getting extended by 10 to 15 years. For instance,if they had planned to finish paying off their 20-year home loan just before their retirement age of 60,the increased interest rates would make them pay till the age of 70 and even more.
So a possible reversal in the interest rate cycle will bring a lot of relief to both producers and consumers in the economy. The stock markets too roundly welcomed this development with a rare bounce as foreign institutional investors returned to buy Indian stocks. This bit of good news was further aided by the comprehensive European bailout package for Greece and the announcement of a much larger corpus of European Financial Stability Fund $1.4 trillion to help banks tide over capitalisation problems. This development is singularly critical for improving economic sentiment in India as also other emerging markets. The timing is just right to attack the growing negative sentiment and create conditions for revival of investment by the private sector. There is still enough pent-up demand over the medium term in cement,steel,power,roads,ports and housing. Policy-makers can create the right conditions for investment in these sectors.
The UPA must consider itself lucky that things could be turning for the better in the political economy. It should now get its act together and show some credible governance initiatives to give momentum to the positive signs appearing on the horizon.
If the UPA has any survival instinct,of which little is in evidence so far,it must take a series of decisions to improve both atmospherics as well as the situation on the ground. It is a perception battle as much as anything else. The prime minister has hinted that the government will bring a credible Lokpal bill in Parliament after its review by a standing committee. There is a buzz that the UPA will surprise its opponents with a stronger than expected Lokpal legislation in the winter session of Parliament. If this were to happen,the opposition will be devoid of one big issue it is riding on.
Besides this,the UPA must also make good on its promise of some other key governance legislation to change the way politics is run in the country. A new electoral funding legislation and a transparent public procurement law are actively being pursued by the UPA. These have the potential to transform the way people look at this government. And the government has enough time to do all this. After all,there are some advantages of an early-life crisis!
The writer is Managing Editor,The Financial Express,mk.venu@expressindia.com
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