Farewell UPA-II

During UPA1 (2004-09), growth rates zoomed & there was a “feel good” factor around. The RTI (Right to Information) Act gave UPA 1 as well as the NAC (National advisory council) much needed credibility. The question of “dual power centres” was raised only in hushed tones and it had not reached a crescendo yet. High growth rates and higher tax revenue thereof gave the government room to spend more on social security- doles in short like the MNREGA which increased rural per capita incomes and hence spurred higher consumption which delighted the private sector. Deeper penetration into rural became the mantra for the private sector thereby blurring the urban rural divide in terms of aspirations & goods bought there-off. The Indo-US nuclear deal pushed through by the PM, Manmohan Singh, gave the government an image of a progressive regime keen on ensuring the energy security of India. The middle class saw one amongst themselves at the high seat of democracy, in the PM’s chair, and applauded his actions. He was “Maun Mohan” but had not got that sobriquet yet; he was seen to be acting if not speaking.  People were optimistic of a better future. The electorate reposed their faith in the government of the day and UPA-II happened.

Yet in all such optimism, what was forgotten was that the best time to implement reforms is when the going is good and not necessarily when hit by a crisis-of the 1991 kind. This is the minimum expected from a pragmatic & visionary leadership. While higher growth and the “trickle-down effect” leads to a spurt in per capita incomes and jobs thereof, the higher tax revenues as a consequence of higher growths help governments to augment social security spends. This if supported through good execution enhances goodwill of the incumbent increasing the probability of the dispensation being voted back to power-an avowed aim of every party.  However the government was guilty of inaction on several fronts-subsidy reduction, passenger fare rationalization, at al. In fact oil subsidy reduction measures, initiated by the NDA government were discontinued. Railways under Lalu and subsequently other leaders of the UPA coalition saw no upside in passenger fares. All this and more led to the catastrophe that followed a few years later. The financial crisis of 2008, an international phenomenon, only made matters worse.

 As per the research conducted by Neelkanth Mishra, director Equity Research, Credit Suisse most important reforms took six to eight years from conceptualisation to having a meaningful impact on economic growth and jobs. As an example, the government started work of national highways in 1998 and the Cabinet approved the first phase in 2001, but road length constructed started to become meaningful only by 2004-05 & the true economic impact in terms of enhanced inter-state trade was felt a few years later. Likewise in private sector insurance, the interim regulator was set up in 1996, and the regulator (Irda) in 1998 while the companies then took a few years to be approved and formed, it was only after 2004 that these companies grew large enough for their hiring to become meaningful. The Electricity Act of 2003, which triggered the substantial increase in private sector capacity in power generation, only started to show up in accelerated power capacity addition by 2010-11, eight years late. Numerous other reforms show such lags too, like the impact of banking regulation changes, the introduction of value-added tax, and opening of the telecom sector. By the same logic, it would be fair to infer that inaction on the reform process during 2004-09 came to haunt the UPA-II government. Many actions of the UPA-I such as shifting of goalposts in the 2G issue, lack of putting in place an auction mechanism for coal block allocation which ultimately led to the coal-gate scam made matters worse.

While the inaction of UPA-I was as responsible for the drop in growth in UPA-II as much as the fragile international environment, the government, unfortunately, has been depicting the international forces as the sole villain. Surprisingly the government appropriates the entire credit for the high growth during 2004-08 period without giving due credit to the healthy global economy and the consequent tailwinds that propelled the Indian economy during the said period but blames the international headwinds for the despicable state of our economy now. The current RBI governor Raghuram Rajan was more forthright when he said in an interview that one third of the dip in the Indian growth rate was contributed due to international forces and two third by domestic forces.

The blame game doesn’t end there. Apart from “international financial headwinds”, the government is busy blaming an interventionist Judiciary, an overzealous CAG and an unsupportive RBI for the mess. The reality is that the problems lay elsewhere.

 Let us look at each of the three institutions who have been vilified by the government & evaluate if there is any substance in the government’s grouse.

Judiciary- The government holds the judicial activism in the 2G issue as an unnecessary intrusion into the executive’s domain. The point to be noted is that the judiciary did not take up the issue suo motto but was dragged into the fray as a consequence of an appeal by the aggrieved parties.

The telecom industry went through a mess post the first round of licences issued in mid-1990’s. The high licence fees quoted by the operators and their consequent inability to pay them upfront created a precarious situation. However, the NTP (New Telecom policy) of 1999 and the introduction of “revenue share” regime brought the sector back on track. The Introduction of CPP (Calling party pays) in 2003 led to the explosion of telecom penetration, which was till then in single digits. TRAI, DOT and the telecom ministry were praised for their interventions. Against this background, when UPA 1 initiated the process of issuing new licences, people from their past experience optimistically expected increased competition to lead to additional consumer benefits & additional job creation.

The expectations could have been achieved but for the bureaucracy-Industry-ministry nexus, the lust for “supernormal profits” by a select few & the “first come first serve logic” with the attendant shifting of goalposts that led to the telecom tangle. Needless to say, when aggrieved parties approach the judiciary, the latter is duty bound to intervene to uphold the spirit of the law and not shrug off their responsibility citing executive and legislative prerogative. 122 telecom licenses, rightly, were cancelled and telecom, which was a robust and high growth sector till then ended in a mess. Is it therefore right to blame the judiciary for the mess, when it was the executive’s flip flops that led to its creation in the first place?

Following the clamour of “judicial restraint” by the government, the judiciary perhaps took a “hands off” stand on the issue of the legalisation of “homosexuality”.  His lordship revoked the Delhi High Court order that made homosexuality legal but gave the government freedom to push through a legislative solution to the issue. The dissenting voices across the political spectrum including a deafening silence by some of the opposition parties on the important issue of the “third gender” was disconcerting to say the least. The government of the day did not show the spine to create a political consensus & work out a legislative solution.  Finally, the honourable Supreme Court had to step in & provide a solution.

How can the government of the day prescribe judicial intervention as necessity in one of the cases and proscribe the same in another case?

CAG- The CAG under Vinod Rai only did its constitutional duty of bringing to the fore the policy deviations of the government and the consequent loss in government revenues-presumptive or real. The CAG spoke of a loss in 2G Scam based on various models including Rs 176000 crores at the extreme end. The government believed that the fig at the higher end was lapped by the media, to sensationalize, a consequence of pandering to the TRP pressures. The subsequent auctions revealed that loss did happen, although the quantum could be disputed & hence debated. The same is true of coal gate.

The question that arises is whether the CAG extended its constitutional brief or was he merely performing his duties. Even if he did extend his brief, which I do not think he did, would it be wrong of a constitutional authority to bring wrongdoings & policy deviations of the government into the public domain? The CAG’s actions, whose constitutional propriety are challenged by the government, were definitely morally right.

RBI-The Government blames the RBI for not heeding its wish for an interest rate drop. The significant point to be noted is that two RBI governors Subbarao and Raghuram Rajan have both taken the same stance prompting the FM to say that the finance ministry shall “walk alone” if need be. Clearly a relook at the situation in entirety shall delve light on the reasons behind the RBI’s actions.

The government breached the FRBMA (Fiscal Responsibility and Budget Management Act) and created an unsustainable fiscal deficit. It was partially a consequence of a “financial stimulus” package during 2008-11. There is a raging debate on whether the third stimulus was necessary, a debate raised by the current finance minister. Higher fiscal deficit and higher government borrowing thereof had the unintended consequence of “crowding out private investment” which combined with other measures spurred inflation- a tax on the poor.

While MNREGA was intended as a social security measure it had the unintended consequence of creating labour shortages during the sowing season and the increase in rural agricultural workers’ wages thereof leading to demands for increase in MSP (Minimum support price). Increase in wages and the APMC (Agricultural Produce Marketing Committee) restriction on free flow of agricultural produce prompted an inflation spiral. The price rise of “onions” before every election prompts conspiracy theories of a quid pro quo arrangement of election funding & a consequent government inaction on “black-marketing” and artificial shortages. Surprisingly, hoarding is not the exclusive domain of the private entrepreneurs alone. The government is the largest hoarder of food grains in the country. The food and civil supplies minister did not heed the court directive to explore possibility of market intervention to cool prices. Not sure why. Are we staring at another scam of the NSEL variety where stocks were shown only on paper?

The government has greater fiscal levers at its command as compared to the fewer monitory levers at the RBI command. The nominal interest rates are a function of real rate plus inflation rate. The government makes no attempts to reduce inflation but demands from the RBI a lowering of interest rates which needless to say is harsh on the depositors since they would have to live on a real rate of interest which is negative. Just because industry is demanding a lowering of interest rates, is it morally right to deprive depositors of a hedge against inflation?  Is it not the problem of a negative real rate of interest that is pushing investors to put their money into real estate & gold? The government, instead of appealing to the patriotic fervour and asking them to desist from buying gold, should make financial investments more attractive. Allowing the RBI to do its job is the first step.

Way forward

The problems of UPA-II are entirely due to its own policy paralysis. 2G, coal gate, CWG, scams led to public outrage which found an outlet through the IAC (India against corruption) movement. This was followed by the formation of an AAP government in Delhi. However scams of the Augusta Westland & Robert Vadra variety still followed. If that was not enough, the government stooped to conquer through the “Retrospective taxation law” which sent across an image of a perverse regime to the international community. Its Foreign policy was non coherent & defence preparedness weak due to delayed modernization plans. Inability to handle the exchange of enclaves with a friendly regime in Bangladesh as well as “neither bark nor bite” when Chinese troops entered into Indian Territory convinced people of a regime which was on the brink of a precipice. Closer home, UPA-II could not enter into any meaningful agreements with the opposition to make parliament work which gave an impression of an egoist government if not an ineffective government unable to engage with an intransigent opposition. Therefore the Congress’s attempt to blame events beyond its control & institutions simply does not help.

Could the government have acquainted itself better? Yes, by engaging the services of a better communication team comprising Sachin Pilot, Sashi Tharoor, Anand Sharma, Chidambaram, Kapil Sibal, & Manish Tiwari apart from the regulars Abhishek Singhvi and Sanjay Jha as the official spokespersons. Surely they could have communicated better & influenced public opinion.  As an example, if opposition ruled states did not agree with coal block auctions the “Coal Gate” mess created is as much a UPA baby as much as it is of the opposition. However the opposition, which itself has many skeletons to hide in the states they rule apart from their complicity in Coal gate, have put up a better show at defending themselves on national television as well as the press.

It is however to UPA-II’s credit that they did become active during the last 1.5 years of their tenure and have initiated several measures including the constitution the CIC (Cabinet committee of Investment) to accelerate investment & RTF (Right to Food) as a social security tool. As usual, they have not been able to market either their social security tool “Right to Food” or their political risky venture of pushing through Telangana with gusto. They shall lose badly in Seemaandhra and in all probability won’t get to form a government in Telengana on their own. That has been the story of UPA-II, of “Missed opportunities”.

With election results expected on May 16, we shall see the formation of a new government. Whether it would be a NDA government or a Third front government is a realm of conjecture. However one thing is for sure. The UPA shall not be forming the next government. Farewell UPA-II.