The New Indian Economy

May 19, 2004

Once, during the early days of India's economic reforms in 1993, simultaneous bomb blasts rocked several major buildings in Mumbai, including its stock exchange tower. Brokers shrugged off the blasts, joking: "It takes more than Semtex to shake the Sensex," in a reference to the well-known explosive and the Sensitivity Index that tracks market movements on the BSE, or Bombay Stock Exchange.

But with a few thoughtless remarks over the past few days, Communist politicians have achieved what the terrorists' explosives could not. Basking in the media limelight after winning nearly 60 seats in last week's elections -- making them the third-largest bloc in India's new parliament -- Communist leaders seized on their moment of fame to denounce privatization and demand the dismantling of India's highly successful ministry of disinvestment.

The result was swift: the market fell 6% on Friday. But rather than learn a lesson from that, the leftist rhetoric continued over the weekend -- and so the meltdown resumed as soon as the markets reopened. The Sensex fell another 11% on Monday, despite circuit breakers twice kicking in to force temporary suspensions of trading. It closed at 4,505 points on Monday, the biggest crash in the 129-year-old stock exchange's history, though yesterday bottom feeders had pushed it up around 250 points by mid-day trading.

To the long list of financial follies that can be ascribed to the Communists, let us add another $55 billion, the value of wealth wiped out of Indian stocks in Friday and Monday's trading.

To be sure, traders should take comfort from the fact that Manmohan Singh, the chief architect of India's liberalization from 1991 to 1996, is expected to become finance minister if a cabinet formed by Congress Party President Sonia Gandhi, or prime minister himself if Mrs. Gandhi steps aside. Sound and incorruptible, he is a seasoned economist who can soothe traders' nerves. Congress also has a few other pro-market, reform-oriented politicians and advisers such as Jayram Ramesh and former finance minister P. Chidambaram.

But lurking beneath them are others with very different views. Men like Arjun Singh and Mani Shankar Aiyar wouldn't mind jettisoning economic reforms out of a misplaced nostalgia for state control, and others, like R.K. Dhawan, would prefer political expediency over sound economics. These are politicians nostalgic for the dreaded permits-and-license Raj, which stifled Indian industry for the first four decades after India's Independence, a period when Congress dominated Indian politics. It was only after an economic crisis erupted in 1991 that then Prime Minister Narasimha Rao gave Mr. Manmohan Singh, by then finance minister, a free rein to deregulate the economy.

The present market jitters are entirely understandable. The electoral arithmetic remains risky, with the Congress-led alliance needing the support of the Communists if it wants to form a stable government. And the left is acting like a prima donna, demanding its time in the spotlight. Last week, Communist Party of India (Marxists) leader Sitaram Yechury spooked traders by saying public-sector "crown jewels" must not be privatized. He wants the state to invest in profit-making state-owned enterprises instead of selling them. Only loss-making companies, which are beyond any hope of salvation, could be sold to private investors.

Mrs. Gandhi has so far refused to give in to such nonsense. Instead she warned Mr. Yechury at the weekend, "to exercise care" in making public statements. But an unrepentant Mr. Yechury ignored her advice and called for the bears whose sell orders made the markets slide to be identified publicly. (And then what? Made to read self-criticisms in public, in good Marxist fashion?)

Mrs. Gandhi, or whoever leads, needs to continue to stand firm against such blackmail and publicly pledge that a government will not reverse the excellent track record of the disinvestment ministry, led by the highly capable Arun Shourie. Better still, the next PM could reassure the markets that he or she will continue the current round of privatization, which involves state-owned oil and petrochemical companies.

It won't be easy. The more the Congress-led coalition has to depend on left-leaning and Communist parties, the greater the pressure to compromise. These are good times for India, even if the outgoing government had difficulty persuading the majority of Indian voters to realize that. And the present prosperity may lull the Congress into taking fiscally imprudent and counter-productive steps such as derailing privatization, in order to please the left.

In fact, it takes some chutzpah for the left to grandstand against privatization, considering the economic policies that the Communists are pursuing in their own bailiwick, the state of West Bengal, which the CPM has ruled uninterrupted since 1977. There, Chief Minister Buddhadev Bhattacharya is wooing multinationals to set up software parks and shopping malls, to transform Calcutta, a city long known for industrial decline and capital flight. Mr. Bhattacharya has hired McKinsey & Co to prepare a blueprint to lure more foreign investors, and told once-militant unions to tamper their demands, including accepting job cuts and flexible hours. PriceWaterhouseCoopers is studying 16 chronically loss-making, debt-laden state-owned companies, to identify strategic partners who might be able to revive them. Two of the companies, considered beyond redemption, are to be shut down.

The policies CPM is pursuing in West Bengal are hardly original; they are based on what Mr. Shourie has done much more effectively at the disinvestment ministry. Until the ministry was set up in 1999, India's privatization had been sluggish. India offered only minority stakes in poorly performing companies with onerous conditions that ensured there were few takers. But Mr. Shourie oversaw the sale of stakes in over 40 companies with a book value of 12.73 billion rupees ($282 million), yielding over 254 billion rupees for the exchequer.

Politicians opposed Mr. Shourie vigorously because state-run behemoths in India, as in many parts of Asia, are prime sources of state patronage. Far from being the commanding heights of the economy as they were intended, many of these companies have been a huge drain on India's resources. They produce little, are mired in debt, yield pitifully low returns on capital and lose huge amounts of taxpayers' money keeping thousands of people employed, often in phantom jobs.

Since 1991, India has had four governments run by different parties, but it has earned international investor confidence by maintaining the momentum for economic reforms, gradually opening the country to foreign investment, reducing tariffs, removing restrictions on domestic companies, and privatizing state-owned companies. There have been setbacks along the way, and the pace of reforms could have been considerably faster. But India is now reaping rewards of the last decade's growth. Its economy is booming, having grown over 10% in the last quarter and likely to grow 8% this year, and its foreign reserves are burgeoning.

The next step should be for the Indian state to get out of running activities such as airlines, five -star hotels and chemical plants. All of these could clearly better be left to the private sector. A Congress-led government can make a good start by continuing to dismantle loss-making conglomerates, and take the government out of businesses the private sector should run.

Mr. Tripathi is a London-based writer.