Economy: Political Crisis: Beyond Uncertainty

The political instability still hurts the economy and business but its fallout is becoming less detrimental.

By promising to go ahead with the second generation of economic reforms which his now-dismissed government had committed to, Atal Bihari Vajpayee may have only been seeking industry's applause at the CII's annual meet on April 28. But the prime minister's words did reaffirm the faith of a small, but growing section of businessmen who have begun to spot hints of stability amidst the raging political upheavals. The first such definitive signs came from the office of the Lok Sabha Speaker on April 19 where leaders of 20 political parties from across the ideological spectrum cleared -- without a single change -- the most important document of 1999-2000, the Union budget.

"The passage of the budget was historic. Never before have all political parties come together to insulate economic reforms from the vicissitudes of politics," proclaims Amit Mitra, secretary-general of FICCI. In fact, had there been a functioning government at the Centre, Finance Minister Yashwant Sinha would have had to face difficulties in getting the budget passed. Observes Rajesh Shah, president, CII: "While political uncertainty could hurt investment and growth, the approach of political parties towards the budget removes doubts over the continuity of reforms."

Is industry rejoicing too soon? Is it reading too much into an act that could have been driven by political expediency rather than a thoughtful resolve to delineate economy from politics? "The parties stalling the budget at this juncture would have had to bear the responsibility of the economic mess that would have ensued. So, the compulsion to clear the budget was as much political as economic," points out Shubhashis Gangopadhyay, professor at the Indian Statistical Institute, Delhi.

But the passage of the budget is not the only indicator of policy continuity. The political vacuum in Delhi also did not deter the Reserve Bank of India (RBI) from announcing the credit and monetary policy as scheduled on April 20. It was not a notional, matter-of-record, policy either. Not only did RBI Governor Bimal Jalan take all those measures policy experts had expected of him, he rounded up his policy with a profound statement: "There is no connection between policy and politics." If what Jalan says is true, it should be possible to have business as usual in the times of political upheaval.

While that may be a far-fetched thought for a business currently frustrated with the process of making and unmaking of governments at the Centre, a growing section of experts has begun to see a silver lining among the dark clouds of political instability. Business' biggest bet is the convergence of economic ideologies among divergent political parties (See table). Having witnessed the performance of 21 political parties in four governments at the Centre since 1995 -- the Congress, the 14 parties in the two United Front governments and 16 parties in the BJP-led government -- most businessmen and economists are convinced of the acceptability of economic liberalisation across the political spectrum. Comments N.N. Joshi, chief adviser with ING Insurance: "No political party is averse to reforms though increasingly parties don't seem to have the time for reforms." The passage of the budget best bears this out. The ease and speed of its clearance displayed both the lack of major opposition to its proposals and politician's preoccupation with non-economic issues.

True, the political neglect of the economy has not been without its cost. The prolonged legislative gridlock (109 bills await parliamentary approval), the recurring bureaucratic reshuffle (the customary administrative shake-up will follow the formation of a new government) and the lingering policy paralysis (the fate of the telecom, exim and aviation policies hangs in the balance) is bound to cripple investment. "Infrastructure sectors like telecom are the worst victims of stop-and-start policy making," complains Rajeev Chandrashekhar, chairman, BPL Telecom. "Infrastructure projects still require umpteen clearances from the government, all of which are now going to be on hold," endorses Kirit Parikh, director of the Mumbai-based Indira Gandhi Institute for Development Research:

Certain industrialists are already complaining of demand slowdown as a consequence of political destabilisation. Says Rahul Bajaj, chairman of Bajaj Auto: "In April there has been no offtake from my dealers." No less inimical is the psychological fallout of the instability. "Uncertainty is a psychological turnoff," remarks Gangopadhyay. "To a prospective foreign investor hearing the news of a government's fall is akin to a foreign tourist learning of the killing of tourists in India."

But of late, even such impact has mitigated perceptibly. The two major international credit rating agencies, Standard and Poor and Moody's, have reaffirmed their current rating of India and have ruled out any downgrade in the immediate future. A more telling instance of optimism in the face of political commotion is the insurance sector. For more than three years now at least five foreign insurance companies have set up offices in India in anticipation of the opening up of the sector, while 15 others global companies have retained their interest in India. All this despite the Insurance Regulatory Authority (IRA) Bill having twice failed to get past Parliament. Explains Joshi: "The delay is disappointing but investors have not lost hope. In fact, the revisions in the draft bill will ensure that the process of private entry will be smoother."

That has a lot to do with the economic education of political parties. Their sheer presence in the government since 1995 has made the 20-odd political parties more convinced of the need for reforms than ever before. Evidence: the BJP now supports the IRA Bill after having bitterly opposed it in 1997. It has also taken a U-turn on the WTO and no longer talks of withdrawing from the global body. Says economist Surjeet Bhalla: "The BJP with its swadeshi bandwagon was the biggest obstacle to reforms. But today its economic policy mirrors that of the Congress." Why, Vajpayee attended as many as eight major industrial meets in his 13-month tenure.

Besides, the uncertainty has its own long-term virtues. Says Pranob Sen, senior adviser with the Planning Commission: "In times when uncertainty is the only certainty, investment decisions start discounting political changes (taking it into account in future decisions). This mitigates both surprise and damage caused by a change in government." Even the most pessimistic observers today concede two points of optimism. The total convergence of the economic policies of the two largest political parties, the Congress and the BJP. And the increased -- though incomplete -- liberation of the economy from politics. While the frequent fall in governments scuttles the latter, it aids the former. That is the lesson from the past three years of political uncertainty.

THE ITALIAN MODEL

It's a country that with stood at least 40 changes in government to become the fifth most industrialised nation in the world. Italy's rise amid perpetually changing governments makes it an apparent model of economic management for contemporary India. Economists, industrialists and politicians have spoken of taking a leaf out of the Italian system to tackle the economic fallout of political uncertainty in India.

But did Italy really insulate its economy from political upheavals? And if it did, can India replicate its experience?

Italy's rise from the rubble of World War II to an industrial powerhouse by the early '60s was powered by twin forces: massive aid from the US under the Marshall Plan and the free-market economic policies of the Christian Democratic Party which was in power from 1948 to 1962.

Meanwhile in India, the ruling Congress embraced economic policies which leaned towards socialism. The era of coalition dawned in Italy in 1963 when the Socialist Party first entered the government led by the Christian Democrats. This was followed by a period of political and economic uncertainty and a consequent fall in investment and economic growth -- something that India is undergoing right now. Ever since, Italy has had to live with fragile coalitions -- the path on which India seems set forth at present. But the instability did not stifle the economic development of Italy because it adopted economic liberalisation a good 40 years (1948) before India did (1991). Comments Giorgio Pietropaoli, who heads the Italian Trade Commission in Delhi: "The Italian economy has always been rooted in the principle of free and open markets." There was never a public-sector monopoly over financial institutions. Instead, the government channelled public resources into infrastructure which boosted growth. By the early '60s, Italy had built an over 1,000-km expressway connecting Milan in the north to Sicily in the south. The highway was an engine of growth for Italy. The country never had industrial licensing and never reserved products for the small-scale industries -- even though over 50 per cent of Italian industry is in small and medium-scale units.

The lesson: coalitions did not derail the Italian economy because the government did not keep it on a tight leash. Rather it played an enabling role. Is that something Indian leaders still need to be told?