Reforms Burst during August-November 2012?

Let me begin by saying how proud I feel on hearing that the government has contingency plans in case of more global madness if Greece exits the EU. Wow! Something is working in the government at last! But such plans can at best contain damage from the contagion that will follow and can not insulate India. It is not the Greek exit that will matter so much but the sentiment of panic that will spread across the globe that will be the greatest threat to all countries. Stockmarkets, banks, every economic activity that is bound to be affected. Lenders will have even lesser confidence in weaker European economies like Spain, Portugal and Italy and their access to capital markets will effectively get denied thanks to risk premiums demanded, something that is already happening with Spain.

Back at home, the Congress party has asked the Government  to pull up its socks. Somebody needs to tell these wise people that in the last six months no effort has worked. Haven't they heard of Newton's first law of motion which talks of bodies being in permanent state of inertia or motion unless acted upon? Once you go into a slumber it is difficult to get out, especially when your allies and the opposition want to ensure that you end up doing nothing. So does this mean that this will continue for the next two years till fresh elections happen? I am talking aboit a lack of reforms that is impacting the economy big time. Let me say what I think might happen till 2012-end from now on.

Once the  Presidential elections get over in July, you can expect a short reforms burst during August- December 2012. Government wants to do it badly. In December, many states go to the poll. This probably the last time the UPA II will be able to reform anything. What could happen during this period? Well, with the support of Samajwadi Party, government is likely to raise diesel prices somewhat. This will not be too difficult. Any hike will help. The government can raise Rs 4 and then roll it back to Rs 2 under pressure from official and unofficial allies. We now have a rich history of rollback starting from the time of Yashwant Sinha,  finance minister during the NDA regime. Second is likely to be the Pension Bill as it can bring in large amount of long-term foreign money. BJP supports the legislation and the Parliamentary Standing Committee had its own Yashwant Sinha chairing it. With some more tinkering TMC might be pacified. A 26 per cent foreign stake is not a bad start. It will bring some more dollars. Then, FDI in civil aviation could open up. the whole sector badly needs it. What else? Well, my hunch takes me only this far and then we shouldn't be too greedy, should we? From 2013 onwards, you can expect little on the reform front with all focus on being re-elected. I don't expect any of the principal political parties to be come out entirely happy with the year-end elections. Then, that's a topic for another day.

P.S By the way, Nouriel Roubini, "Dr Doom" does have many nice things to predict in 2013. A google search will help in reaching videos and articles. http://www.roubini.com/analysis/174887.php. All the stuff got uploaded yesterday

A Problem Called Europe

Uncertainty over events in Europe and its impact on the European crisis continues to take a toll across the globe. In India, its impact on stockmarkets this week is clearly visible where despite the Finance Minister's clarification on GAAR (which to some is "half-hearted", if not half-baked") there have been downward moves in the market and less-than-required-enthusiasm. To me, the "euromess" if I am allowed to coin this has two important messages. First, to enjoy economic benefits of a economic union you need to have monetary and fiscal policies both under single control. Minus the fiscal levers and fiscal discipline, it is not very difficult to get into the kind of mess Europe has got into. For instance, tt is now common knowledge that all the members of EU have flouted their fiscal deficit many times during the period the Union has been around. Included in the list is Germany which at times pontificates to other nations. If you take a step back and take a hard look, you will see similarities between and Europe and India as well. While India's monetary authority has been taking action in the recent past in India we don't find matching contribution by the government on the fiscal front.

The second lesson from Europe is the more worrying one. Recent elections have thrown out governments that have been following policies of economic austerity. While there are eminent economists such as Paul Krugman who feel that these policies should have not been initiated in the first place since what was required was more good old Keynesian government spending to create jobs and not worry about deficits and inflation as some governments have, the message from the electorate is that if a government's policy doesn't work for people, it will be thrown out. But can people throw out a system be thrown out if it doesn't work? History is replete with examples be it Germany in early 1930's or many others when demagogues seized power after thwarting democracy, free speech and free markets, encashing on people's desperation. In Spain, it seems about 50 per cent of the youth are unemployed. Anybody in the know of the economic situation can tell that the current euromess and global financial crisis will not go away in a hurry. Thus, while it will be easy for political parties and politicians to seize power encashing on popular disenchantment, it will not be easy to deliver the moon they promise as there are no easy ways out of the mess. The danger lies in people getting disillusioned with existing systems altogether and we will have a global cesspool. If one reads accounts of Greeks reeling under the impact of austerity measures one would start realising the meaning of "lost generation". While in US the situation is better thanks to a lower unemployment rate, but profound changes are already happening to people and their lives. Popular media is documenting how people even in their 70's are continuing to work sometimes at half the pay, because they can't afford to lead the retired life. The other scary lesson from anti-austerity movements is that once people get used to certain things they will not be able to live without them. It will be difficult for politicians to convince people on matters of economics. For instance, how will you convince people in India to pay user charges for electricity, cooking gas and diesel? Who can? Try telling this to our legislators who dole out one freebie after the other to the public as if there is no tomorrow.