Sucheta Dalal :Good intervention bad intervention
Sucheta Dalal

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Good intervention, bad intervention  

Mar 12, 2007

 Less than six months ago, leading media houses were lionising India’s “original reformers” for their foresight in kicking off the economic liberalisation process in 1991-92. Since the original team was back in the saddle even as India’s GDP growth touched 9%, it was a great opportunity to score brownie points. A few months later, political reality in the form of electoral losses has collided with free-market idealism, and the cheerleaders suddenly claim to be ‘shocked’. In fact, history is merely repeating itself. Last time, this very team had to put reforms into cold storage as elections approached. Liquidity was sucked out of the system and industry was brought to its knees as interest rates spiralled, demand fell and the economy slowed down. Infrastructure development made no headway and the electricity sector was badly messed up to accommodate the infamous Enron (and it remains as much of a mess today); precious little was done about ‘sadak’ (roads) and ‘paani’ (water) either. Increasing ‘user charges’ was the popular rhetoric those days and policy was framed in the belief that Indians would cough up usurious tolls and tariffs to pay for inflated infrastructure projects.

We mistakenly believed it was different this time because considerable progress has been made in the last 15 years. But little has changed at the very core. Policies are dictated by vested interests and framed by ministers and bureaucrats who are usually too arrogant to bother with market feedback. This is not a Congress party affliction, but held just as true for the BJP-led National Democratic Alliance.

A decade after P Chidambaram’s ‘Dream Budget’, the market seems stupefied at his ill-conceived excise duty structure for cement. Apparently, the government found it unnecessary to check how industry would react to such a move. The subsequent arm-twisting of industry was hardly unexpected, but cement manufacturers’ defiant rhetoric on Budget day was indeed surprising. The zig-zag movement of cement company shares since February 28 has several cynical observers wondering if there is more to the drama played out on the stock market than meets the eye. It certainly provided a perfect opportunity for informed traders to make easy money. The pressure on steel manufacturers to hold prices is a piece with the action in cement, but it is unlikely that there will be any investigation into what led to this. 

The other point of post-Budget agitation was the decision to ban futures trading in rice and wheat, in addition to urad and channa. The seeds of turmoil were in fact sowed by the BJP-led regime that flaunted its closeness to the trader community. It probably explains the rush to restart futures trading in a slew of agri-commodities after a 40-year hiatus without bothering with adequate checks and balances. Automated multi-commodity bourses, without an independent and empowered regulator is meaningless. Permitting futures trading without the necessary education or linkages to ensure that benefits percolate to the farmers (making warehousing receipts negotiable is one such issue) was clearly dangerous. Yet, 23 regional bourses for spot trading were also allowed to expand without proper automation and supervision; local ‘mandis’ where spot price discovery happens remain in a state of neglect and agricultural marketing boards have not been revamped. Shockingly, a World Bank-Unctad study titled ‘Managing Price Risks in India’s Liberalised Agriculture: Can Futures Markets Help?’ had already warned that futures trading in rice, wheat and sugar would be “non-viable” in India without a change in certain market ground rules.

The booming realty sector is another that seems ripe for hamhanded corrective intervention. The business is crying for uniform regulation governing multiple aspects
In a democracy, managing public sentiment is key to political survival and there is a clear public perception that hoarding is responsible for the price spiral in food grain. Since food prices have indeed cooled a bit after the ban, it is all the more difficult to argue that rising prices were merely an outcome of demand-supply issues and little else. Interestingly, free-market proponents who happily heap derision on the government for the commodity futures ban are relatively sanguine about the absence of a powerful regulator. 

The booming realty sector is another that seems ripe for hamhanded corrective intervention. The business is crying for uniform, nationwide regulation governing land acquisition, registration, documentation, construction and rules for valuing and verifying landbanks. Realty companies have been allowed to raise several thousand crore of rupees from the capital market based on self-valuation of their projects.

An independent realty regulator is long overdue, but the powerful builder lobby, which usually provides a cover for unaccounted political money, has ensured it remains untouched. It is safe to bet that there will be a rush to regulate realty if a sharp correction in prices leads to widespread defaults by over-leveraged investors.

The same is true of our FDI policies. Consider how the issue of Hutch telecom’s Indian ownership has blown up only after a powerful industry group decided to squeal. Until then, the government was looking the other way. The flouting of absurd FDI rules by routing a part of the foreign shareholding through Indian front companies is hardly a secret. But investigations are launched either at the behest of corporate rivals or to put headstrong industrialists in place.

All these warts are an integral part of India’s reform process. Smart stock market operators realise this, which is why they trade on inside information from the very top.

-- Sucheta Dalal