Political arithmetic is far more important than the Budget itself
February 27, 2002
The market reacted to a tough talking Economic Survey and a Railway Budget that hiked fares by zooming upwards. When the finance minister announced that we are in for a rough time, the market cheered and institutional investors bought more shares.
That is because the last few weeks have provided plenty of reason for optimism on the policy front; the government seems willing to kick-start reforms, take hard decisions and push development. But the question is are stock prices being irrationally exuberant? And do the numbers add up? Let us see.
The biggest bullish factor is, of course, Divestment Minister Arun Shourie's performance. He has been able to brush aside a baying Opposition on the sheer strength of his personal integrity and the transparent bidding process that he has put in place.
Intriguingly enough, it was the decision to sell off Paradeep Phosphates below the reserve price that won Shourie more brownie points than the absurdly high price paid by Indian Oil Corporation for IBP Ltd.
The Railway Budget was also practical. It spared industry another freight hike, put an end to the Mamata Banerjee-type populism and went on to hike and rationalise passenger fares. More importantly, it took steps to save the Railways from the opportunistic exploitation of future rail mantris by linking fresh project investment to a formula which gives the biggest weightage to carrying forward ongoing projects and a 15 per cent weightage to states based on their area and population.
These are indeed bullish developments and they seem to justify the near 100-point increase in the Sensex.
The Economic Survey confirms that the economy is in a bad shape, that exports are slow, the fiscal deficit out of control, that most economic targets have not been met and many Budget promises have not been kept.
It also makes a case for a slew of reforms. In a nut shell, it pitches for: infrastructure development, higher user charges, capital market reforms, cut in subsidies, more privatisation, labour reform, reduction in fiscal deficit, lower interest rates and a cut in the savings rate. At the same time, it argues for safety nets for the elderly who are badly hit by the drop in earnings on their investments.
The survey suggests that although Sinha's dream Budget had ended in a nightmare last February, the economy is set for a turnaround in 2002.
But isn't the market forgetting something important? The numbers of the Economic Survey and the government's intention to push reform are far less important than the simple arithmetic of the two Houses of Parliament.
Assuming that Sinha delivers as good a Budget this year, it would still not be good enough. Just as Ketan Parekh's shenanigans destroyed Sinha's dream last year, the political weakness of the ruling coalition could rip it apart this year.
After the recent assembly elections, the political arithmetic has become far more important than economic numbers totted up by the glossy Survey document. My fear is that the government may have woken up too late.
Look at the facts. The Bharatiya Janata Party-led government has always struggled to get all major bills cleared by the Rajya Sabha where it does not have a majority; its Lok Sabha numbers too are hardly comforting. The assembly elections, which have seen the Congress emerge stronger with 13 states under its control, have placed the BJP with its back to the wall.
The Congress is clearly beginning to smell blood. It is now in the Congress's political interest to embarrass the government and thwart all reforms to show up the BJP and its allies as a bunch of bumbling and incompetent no-gooders.
This would ensure that the anti-incumbency factor against the ruling coalition remains high and keeps BJP's numerous allies restless.
Fortunately for the Congress, there is no shortage of issues. If it is not the Budget and labour policies, it can always disrupt Parliament on the issue of coffin imports during the Kargil insurgency.
Issues such as labour reform are just the fodder that opposition parties pounce upon. The level of debate on this issue is plain absurd.
The Left parties, who are politically inconsequential today, continue to hog a disproportionate amount of television time to hawk viewpoints that ought to have been left behind in the last century; and the Congress Party often joins the chorus.
It is not that any of us is arguing for a hire-and-fire labour policy, but the Opposition and the Shiv Sena are not protecting labour either. They are only protecting a tiny segment of organised labour that they control through national trade unions.
By refusing to allow industries to close down, these parties only help industrialists to strip assets, build up bad loans with banks and abdicate all responsibility.
The problem is that government has consistently failed to explain the need for labour reform to the masses (a few sound bites on frothy television shows do not count).
As for industry associations, who really ought to have led the lobbying effort - they seem to think that lobbying an issue is all about holding innumerable seminars at five-star hotels to provide photo opportunities to the same gang of their own office bearers, bureaucrats and politicians.
But the Congress's biggest chance of embarrassing the government is less than a fortnight away when the Vishwa Hindu Parishad begins to build the Ram temple. Thousands of devotees and assorted Godmen have already gathered at the Ram Janmabhoomi site and anyone connected with the VHP would tell you that a gigantic nationwide programme is in place to storm the place and build the temple, irrespective of the consequences.
The BJP is aware of this too. Nobody is fooled by its pious willingness to sit in the opposition in Uttar Pradesh. Its readiness to stay out of power has little to do with principled politics or recognition of the people's mandate; in all probability, the BJP simply wants to say out of the immediate line of fire when the Mandir issue blows up on March 14th.
The open flouting of the Supreme Court order about building the Mandir is bound to create law and order problems and any state government, which initiates stringent action against the majority religion risks alienating big chunks of the electorate.
It could also provide an opportunity for some of BJP's allies to break away from the coalition and join another political formation.
My suggestion to investors would be to watch out. We have seen two dream Budgets being destroyed by political developments or financial scandal. Although the Budget is important, the government's ability to implement it and get it passed by Parliament is much more important. Any bullishness that does not give a higher weightage to political uncertainty is plain foolishness.