February 6 could well have been the "Celebrate Inaction Day" for corporate India. Dulled into zero-expectation mode by the prolonged inaction of the Atal Bihari Vajpayee Government, Indian Inc couldn't stop praising the apparent burst of economic reforms unleashed a day before. "Tumultuous Tuesday", "Bombshell", "9/11-to-5/2"-business writers couldn't hold back the deluge of epithets they had kept in abeyance since Budget 2001 when a similar shower of compliments was suddenly silenced by a combination of scams and inaction. "There is a mixed feeling of surprise and relief that things have finally started moving," comments Arun Bharat Ram, chairman, SRF Ltd.

In retrospect, all the five major decisions cleared by the Cabinet on Tuesday evening were long overdue. A new VRS for government employees was promised in February 2001, a road map for sugar decontrol was laid out in 1996, the process of oil price dismantling is on since 1997 and privatisation is a 11-year-old story of false starts. By taking a step or two forward on all these in one day the Government demonstrated that it has rediscovered reforms. "The measures came late, but as is said, better late than never. The Government seems to have realised that unless it begins the second generation of reforms, the economy will languish," says R.H. Patil, chairman, Disinvestment Commission.

"There is a sense of relief that things are finally happening." Arun Bharat Ram, Chairman, SRF Ltd

Indeed, the delay doesn't take away from the merit of some of the substantive measures. Lifting of controls on the production, distribution and pricing of wheat, rice, sugar and a few other food items could-if follow-up action is taken-drastically improve the fate of rural India. Though the sham of calling the sale of one state-owned company to another privatisation still continues, most experts believe that major hurdles of the past have been crossed. Even a diehard proponent of privatisation, Omkar Goswami, chief economist at CII, admits that though he is cautious about the pace of privatisation, it is clear that the Government has overcome the obstacles.

But that can't yet be said of the proposed government downsizing, which was one of the commitments made in Budget 2001. Add to that the more substantive unfulfilled promises of reforms in labour, power and interest rate reduction. That's why there is unanimity that while February 5 has pepped up business confidence, it won't boost investment, employment or incomes. Points out Subir Gokarn, chief economist with the NCAER: "The package of measures announced on Tuesday is a good appetiser. But for investments and the economy to recover, the main course of reforms must follow."

PRIVATISATION

DECISION: 33.6% of IBP sold to IOC for Rs 1,154 crore. 25% of VSNL sold to the Tatas for Rs 1,460 crore. Four ITDC hotels-Mumbai's Centaur, Delhi's Qutub and Lodhi, Udaipur's Laxmi Vilas Palace-sold for Rs 202.52 crore.
IMPACT: Privatisation receipts in 2001-2 could rise to Rs 7,000 crore if Maruti and IPCL equity are sold by March. Impressive but short of Rs 12,000 crore target for the year.

What's privatisation? a basic question like this 12 years into privatisation would sound moronic. But it's not because the Government still calls the sale of the public-sector IBP to another PSU, IOC, privatisation. Gokarn terms it a shenanigan, many others call it jugglery. But Disinvestment Secretary Pradip Baijal has an explanation. IOC has surplus refining capacity and IBP has none. IOC owns 50 per cent of India's oil retail distribution, IBP's share is only 4 per cent. It's the potential gain from this synergy that prompted IOC to bid for IBP at a price (Rs 1,153.68 crore) that was almost double the second highest bid of Rs 595 crore from Royal Dutch Shell. At the cabinet meeting, objections were raised-most vociferously by the cabinet secretary-to IBP's sale to IOC but they were overruled. The Government feared that selling IBP to Shell at half of what IOC had bid could lead to charges of a sellout to a foreign company and the Opposition could derail the privatisation process. To prevent a monopoly in the marketing of petroleum products IOC has been barred from bidding for HPCL and BPCL. But critics say this may prevent getting the best price for the two PSUs. Besides, as an industry insider points out, "Hopefully the Government will prevent creating a monopoly in refining while privatising HPCL and BPCL."

This debate apart, the sale of VSNL and ITDC hotels is a big step forward. There is no ideological resistance to selling profitable PSUs. And no more allegations of undervaluation. That's as much due to the streamlining of the valuation process as to the Supreme Court's ruling that valuation can't be challenged routinely. "The ball will now start rolling. Raising Rs 15,000 crore through privatisation in 2002-3 can now be considered a small goal," avers Patil. A big spin-off is the positive impact on the stock markets. The Sensex rose 116 points on February 6, a rise rarely seen in bearish times. "Small investors will be able to participate in open offers made by PSU buyers and there will be more good stocks on offer," says NSE MD Ravi Narain.

Reform Rating: ***

DECISION: A new VRS for government employees identified as surplus. Those opting for VRS entitled to 35 days' basic pay and DA for every year of completed service and 25 days' for each year of the remaining service period.
IMPACT: Aim is to prune the 35-lakh Central government staff by at least 10 per cent and reduce the Rs 32,000 crore annual wage bill. Impact depends on number of takers.

"Investment depends on results, not announcements." Omkar Goswami, Chief Economist, Confederation of Indian Industry

Till 1989, there was a provision for compulsory retirement of surplus government officials who neither opted for voluntary retirement nor could be redeployed within six months of being declared surplus. If nobody has heard of this provision it's because it was never invoked. The question is, if a compulsory retirement scheme couldn't be implemented in Indian officialdom, will a voluntary retirement scheme (VRS) be successful in pruning down its size? Especially at a time when new job opportunities are negligible; more so for class II, III and IV government employees who many believe are paid disproportionately higher than the value of their skills. On its part, the Government hasn't yet declared the size of its surplus staff. Former chairman of the Expenditure Reforms Commission (ERC) K.P. Geethakrishnan suggests offering VRS to all Central government employees below the rank of joint secretary and not just restricting the offer to surplus staff. A possible brain drain that may follow could be taken care of by retraining the leftover staff to do the work of those who opt for the VRS.

Of course, the easiest way out is to turn the VRS into a CRS-Compulsory Retirement Scheme. But for the moment, that's a political impossibility. That's why the Fifth Pay Commission's emphatic advice to cut the bureaucratic flab through a combination of voluntary and compulsory retirement schemes has been languishing since 1996. More detailed reports on government downsizing submitted by the ERC in 2000 and 2001 too haven't been implemented. That means the latest VRS is at best an enabling possibility, and at worst an outright sham.

REFORM RATING: *

FOOD SUPPLY & PRICES

DECISION: Removal of licensing and restrictions on storage and movement of wheat, rice, sugar, oilseeds and edible oil by taking them off the Essential Commodities Act. Cement, textile machinery and electrical goods also freed.
IMPACT: No Central government interference in pricing and sale of decontrolled commodities. But states' control remain. No significant price rise likely.

Till February 6, storing more than 800 kg of sugar was illegal under the Essential Commodities Act (ECA), 1955. It's another matter that 11.7 million tonnes of sugar is stocked with sugar mills. Even lower limits of stocking were prescribed for foodgrains, whose movement from one state to the other was also restricted, and in some states from one district to another. That's when about 60 million tonnes of rice and wheat are lying unsold in government godowns. Licensing of sales and restrictions on movement of electrical parts (plugs, switches, etc), cement and textile machinery also existed. Clearly, vestiges of the 1950s and the '60s-food scarcity and commanding controls of the government-had dictated the policy so far. That such laws weren't abolished in the 1990s is worthy of mention in Ripley's "Believe It Or Not". These unbelievable rules are now out following a drastic modification of the ECA. "The rules made to tackle scarcity can't continue in the times of surplus," says Union Food Minister Shanta Kumar.

In the absence of excess supply of foodgrains or sugar, the decontrol of prices and movement could have pushed up the prices. That's unlikely to happen soon. The private trade in foodgrains will pick up with the removal of licensing and stocking limits. But farmers won't be able to sell their produce at the best available market price till a futures market is established for trading in commodities, similar to the derivative equity market where sale and purchase deals are for future. The Government promises to start futures trading from November where sugar will be the first commodity to be traded, gradually followed by all agriculture crops. Only when such a market is in place can a rice farmer in Bengal deal with a buyer in Kerala for selling his rice months before harvesting it. That will reduce distress sale by farmers.

"Setting up of a futures market is critical to the success of price and movement restriction," says A.K. Goel, president of Indian Sugar Mills Association. The other follow-up actions needed are changes in the government policy of purchasing foodgrains, the root cause of 60 million foodgrain in stock, end of state governments' intervention in pricing of sugarcane and a vastly improved food distribution network. Kumar has promised a new food policy in two months that will address some of these problems.

Reform rating: ***

DRUG DECONTROL

DECISION: Span of price control reduced from 74 drugs to estimated 38. Vitamins, aspirin and ciprofloxacin off price control, so are all vaccines, biotech drugs and serums. Nineteen drugs brought under price control-including ibuprofen, chlorophenarmin and maxformin.
IMPACT: Price of some decontrolled drugs to rise but a flare-up unlikely.

First a rider. The Drug Policy 2002 is a policy that is ready, but not ready. The Government only released objectives of the policy on February 5 and no other details, even though it had been cleared by the Cabinet. Asks Dilip Shah, former country head of Pfizer and CEO of Vision Consultant: "If the Cabinet has cleared the policy, why isn't it made public?" Even two days after the amendment, it was not clear to the industry what the exact changes to the Drug Price Control Order were.

"Competition will ensure that drug prices don't skyrocket." B.K. Raizada, Senior Vice-President, Ranbaxy

From the cursory information available it is clear that the Government is reducing the span of control over drug prices. Industry is quick to put off any fears of a significant price rise following decontrol. Reason: India's Rs 20,000 crore pharmaceutical industry has close to 8,000 companies. Most major drug molecules have more than 40-in some cases, up to 100-competitors. That should put a damper on prices. In fact, as Wockhardt Chairman Habil F. Khorakiwala points out, some price correction may benefit the consumer by improving the availability of certain drugs. For instance, when aspirin prices were brought down from Rs 4 to Rs 2 for 10 tablets, most companies stopped manufacturing it and the drug became scarce.

The Government's commitment to providing incentives to the industry for investment in research and development is an opportunity for Indian companies to keep their head high in the product patent era. But not everybody is convinced. "We are not sure how the Government will translate a thought process into policy implementation," says B.K. Raizada, senior vice-president, Ranbaxy.

Reform rating: **

DECISION: Prices of all petroleum products, barring LPG and kerosene, to be freed from April 1. After that petrol and diesel prices to move in tandem with global oil prices. The extent of subsidy for LPG and kerosene to be decided in the Budget.
IMPACT: Petrol prices could fall marginally in the next two months. Prices of kerosene and LPG to rise in April.

Even though the process of dismantling petroleum prices is on since 1997 and the Government has promised complete decontrol by April 1, not all the groundwork has been done. No independent regulatory authority has been set up yet to monitor pricing and ensure competition. A meeting of the Prime Minister's Business Advisory Council scheduled for February 17 to discuss petroleum price dismantling has been scrapped. The key issues to be settled are the extent of subsidy reduction on LPG and kerosene (current subsidy 40 per cent on LPG and 37 per cent on kerosene) and change in the type and rate of taxes currently imposed on petroleum products.

Reform Rating: **

Whatever may be the individual worth of each decision, collectively the package has been able to achieve something substantial. It has restored the industry's faith in the Government's ability to act. With a slew of reforms scheduled over the next two months, the Government will have plenty of opportunities to prove itself worthy of that faith. If it does that, the reward could be a quick economic recovery.

*** = Profound ** = Middling H = Marginal