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June 17, 2009

Big Government Is Back!

The new UPA government's first policy statement - the presidential address (PA) to Parliament - gives Business Standard columnist and former Chief Economic Adviser Shankar Acharya a feeling that this government is set to unleash a host of programmes (read big budget "yojanas" like the NREGS).
The last five years of UPA rule witnessed an ambivalent mixture of trends. On the one hand, the government stopped privatisations and disinvestments, halted most reforms, strengthened price controls on petroleum products, fertilisers, food grains and selected interest rates and undertook major expansions of social programmes (notably the NREGP) and caste-based quotas in education and public employment. On the other hand, a potent combination of past reforms, successful fiscal consolidation (till spring 2008) and the liquidity-fuelled global boom propelled the biggest surge in private investment that India has ever seen, spurring economic growth to 9 per cent.

Now things seem set to change. The “ten broad areas of priority” outlined in the PA (including security, communal harmony, growth, infrastructure, social uplift, governance reform, etc) are mostly unexceptional...But the principal vehicle for achieving these goals will apparently be government programmes of one kind or another. These will include existing “flagship programmes” such as NREGA, the National Rural Health Mission, Sarva Shiksha Abhiyan, Bharat Nirman and Indira Awas Yojana. Ambitious new programmes are also promised, including a Madhyamik Shiksha Abhiyan for universalising secondary education, a Rajiv Awas Yojana for slum dwellers and a significant new National Food Security Act for guaranteeing 25 kg of food grain per month for every below-poverty-line family at Rs 3 per kg. (Never mind that the public distribution system hardly exists outside the four southern states, Bengal and a couple of metropolises and that the costs of the system compare very poorly with private distribution channels). Furthermore, although disinvestments from public sector undertakings (PSUs) will be resumed, government will retain majority ownership. So the present PSUs will continue indefinitely, even if they are in hotels and tourism. Even in banking, the minimum 51 per cent government ownership of PSU banks will be retained, with their need for fresh capital (for expansion) being met from the government budget.

...To end on a brighter note, there are a few green shoots of reform scattered through the PA. These include: reform of higher education along the lines recommended by the Knowledge Commission; a more investor-friendly approach to public-private partnerships in infrastructure; implementation of the roadmap for the Goods and Services Tax; “operationalising the provision of open access” in the power sector; reforms in the coal sector; a roadmap for judicial reform; and encouragement of foreign direct investment. But even if these green shoots all mature into full grown healthy plants, will it be enough to power the high levels of private investment necessary to recover and sustain rapid growth?

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at