The Atal Behari Vajpayee government has become weaker in the wake of the assembly elections to Tamil Nadu, West Bengal, Kerala and Assam. In each of these four states, the ruling Bharatiya Janata Party (BJP) was at best a marginal player. However, after the elections, the BJP has become even more marginalised in these states of eastern and southern India.
While the outcome of the elections would not have a direct or an immediate impact on the stability of the National Democratic Alliance (NDA) government, what cannot be denied is the fact that the largest opposition party, the Indian National Congress, has emerged much stronger. Consequently, supporters of the NDA government have become a trifle less sanguine about its ability to last the full course of its five-year term. Though government spokespersons will not admit it publicly, their comfort level has definitely decreased.
Will this development strengthen the Vajpayee regime's determination to push through economic reforms at a faster pace, as the government's supporters bravely contend? On the contrary, there is a distinct possibility that the speed at which policies of economic liberalisation were being pursued would slacken.
The fact that the Union government has been weakened after the assembly elections is but only one of the many factors which are responsible for the slowing-down of two ongoing economic processes. The first process is the opening up of the Indian economy to the rest of the world while the second relates to the revamping of ailing public sector undertakings and privatisation of government-owned corporations. On both these contentious issues, the political consensus has been breaking down over a period of time.
Before one looks at the various reasons responsible for this lack of consensus, let us first consider the views of those who argue that the Union government's resolve to push ahead with its programme of economic reforms has not been - and will not be - adversely affected.
On the evening of 9 May, the day before voting to the state assemblies was to commence, the Cabinet Committee on Economic Affairs virtually opened the floodgates to foreign direct investment (FDI) in a number of sectors. It was announced that 100 per cent FDI flows would be allowed in a range of industries such as drugs and pharmaceuticals, airports, hotels and tourism, mass rapid transport systems, development of townships and courier services.
More importantly, the Cabinet announced that 26 per cent foreign equity would be allowed in companies engaged in producing goods for the defence services. This hitherto "sensitive" sector has been opened up to private domestic firms. Foreign companies have further been allowed to hold 49 per cent of the equity capital in banks and 74 per cent of the equity of internet service providers and firms providing paging and bandwidth services. Officials claimed these moves indicated the seriousness with which the Vajpayee government intended to achieve the current fiscal year's target of an FDI inflow of US $ 10 billion. Against this ambitious target, actual FDI inflows during 2000-01 were less than one-fifth the amount at around $ 1.5 billion.
The following day, 10 May, Finance Minister Yashwant Sinha met the "Who's Who" of the Indian corporate world and discussed steps to revive the sluggish industrial growth rate.
As industrialist Rahul Bajaj stated after the meeting, the government as well as captains of industry were both concerned at the fall in demand. The same day, sales audit figures issued by a leading market research outfit disclosed a 3.3 per cent growth rate in the sales of fast-moving consumer goods (FMCG) during the January-March period. The rates of growth of this sector have come down each quarter in the last financial year: from 11.5 per cent to 8.6 per cent and 4.3 per cent. Two major companies in this sector, Hindustan Lever and Tata Tea had recorded an actual drop in sales in the January-March period, the audit figures indicated.
In order to provide a liquidity boost, the country's central bank and apex monetary authority, the Reserve Bank of India announced on 12 May that it was reducing banks' cash reserve ratio (CRR) - an indicator of the proportion of banks' reserves that has to be maintained in the form of readily-available cash - to a record low of 7.5 per cent with effect from 19 May.
The same day, addressing a function organised on the occasion of the golden jubilee of the National Sample Survey Organisation, Prime Minister Vajpayee stated: "There is no need for questioning the basic direction of our reform process. The need of the hour is to strengthen the national consensus on reforms." He acknowledged that economic reforms had been initiated by a Congress government and had been carried forward under two United Front governments and was being actively pursued by state governments ruled by different political parties.
The Prime Minister is correct, but only up to a point.
The consensus on economic reforms has been breaking down periodically and this is most evident in the Sangh Parivar itself. Senior leader of the Rashtriya Swayamsevak Sangh (RSS), the ideological parent of the BJP and founder of the trade union wing of the Parivar, namely, the Bharatiya Mazdoor Sangh (BMS), Dattopant Thengadi has still not expressed an apology for describing Finance Minister Sinha as a "criminal". Thengadi had flayed Sinha at a public rally for encroaching into the territory of the Labour Minister when he announced the intention of the government to effect a series of wide-ranging changes in the country's labour laws in his Budget speech.
If the Finance Minister has his way, the government will make it easier to hire and fire workers. This has predictably upset trade unions of all political hues, not excluding the BMS. The RSS is particularly upset with Sinha as its leader K S Sudarshan had, in March 1998, persuaded the Prime Minister to nominate him as Finance Minister instead of Jaswant Singh. It may be recalled that Singh had held the Finance portfolio during the 13-day Vajpayee government in May 1996.
A weak Union government will find it difficult, if not impossible, to push through politically-difficult economic policies. Witness the big hue and cry raised over the privatisation of Bharat Aluminium Company (BALCO). Note also the absence of consensus on whether India should participate in a new round of negotiations at the World Trade Organisation (WTO). At a time when employment in the organised sector of the Indian economy has actually shrunk, the government will not be able to implement policies which are perceived to be against the interests of labour.
It is not just the public sector which has failed to create new jobs. For the first time in many years, some of the best-known names in Indian industry are pruning their workforce. Such corporates include Reliance Industries Limited. Even the head of Tata Steel, J J Irani, who used to take a great deal of pride in the manner in which his company would fulfil its social responsibilities, has had to post a posse of guards outside his office at Jamshedpur.
The stock market scam, which removed all the sheen from Sinha's industry-friendly Budget within a few days of its presentation, is now being inquired into by a Joint Parliamentary Committee. This too could add to the government's diffidence in undertaking radical financial sector reforms at this juncture. Farmers are scared of impending imports of agricultural commodities at rock-bottom prices and owners of small-scale industrial units have made common cause with their large corporate counterparts in opposing imports from China. The threat of cheap imports has partly contributed to the fall of at least one state government, that is, the Kerala government which is excessively dependent on revenues from cash crops like coconut, rubber, spices, tea and coffee.
Whether the government likes it or not, the rate of growth of the world economy - in particular the American economy - has come down.
This is bound to have an impact on Indian exports since as much as a quarter of this country's merchandise exports goes to the US. What makes matters worse is that three-fourths of India's software and information technology exports go to the same country. Indian stock exchanges have also been negatively impacted by the volatility of the NASDAQ.
Adding to the economic woes of the government, last year's revenue collections have fallen below the "revised estimate" by roughly Rs 6,000 crore. The fiscal deficit would have been badly hit had it not been for the fact that expenditures have also come down to the tune of around Rs 4,000 crore, curiously, on account of lower defence purchases in the wake of the tehelka expose. Normally, government purchases pick up substantially in the month of March, but thanks to tehelka, defence expenditures got stalled. That is some consolation for a government whose image got badly battered by the scandal.
Unlike countries like Italy and Japan where political instability has a negligible impact on the stability of economic policies, the situation in India is quite different. An unstable or a weak polity invariably has its repercussions on the economy. There is no doubt that tough times lie ahead.