It’s politics, stupid

The raise in FDI cap in telecom in 2005, was not so much about economic reform as it was about the maturing of our political process. All reform at the time, was hard politics.

File photo of Sonia Gandhi and Manmohan Singh | PTI

If you read the editorials in the pink press, they all seem to have major quibbles with this week’s announcement of increased FDI limits in telecom, and with good reason. The decision is encumbered with so many qualifications that it does not pass the test of classical reformist scrutiny. But in this, the pink papers as well as reform fundamentalists are both missing the point. The raise in FDI cap is not so much about economic reform as about the maturing of our political process, at least to the extent that it relates to economic management.

You might think I am taking too optimistic a view of this. But consider the facts. Here was a decision that even the more unabashedly reformist NDA had put off at the cabinet level after L.K. Advani opposed it, at the behest of the Sangh Parivar’s ultra-conservative, and utterly extra-constitutional, lobbies. The UPA has managed to ease this in despite the reservations of the Left with it as it is legitimately tied up with a CMP. Next, this was perhaps the first case in the ongoing reforms debate that the argument took place purely on facts and merits, and in public. The Left issued a paper questioning the idea. Pro-Left commentators and columnists wrote and talked about this in the mainstream media. The finance minister issued a paper in rebuttal, which was also fully in the public domain (in fact The Indian Express published both: ‘Telecom leap-frog is impossible without FDI’, October 15). A reasonable amount of time was allowed to lapse for the debate to carry on and the decision has been taken more than six months after it was announced in the budget. The Left is still talking of protesting. But mind you, these will be token protests, more for the record than with the intention of causing a reversal or a roll-back. A somewhat similar debate, though less formally so, has been building on the banking sector reform road-map and soon enough we will see a decision. Once again, this will involve give and take and the final package will fall short of classical reformist expectations.

The reform that may look inadequate, or compromised, from an economist’s or a pink paper’s perspective can look very different from a political viewpoint. Much of the low-hanging fruit on the reform tree has already been plucked. What comes now is the tough part, fundamental tax reform, setting up new regulators, consolidation of oil and aviation and banking PSUs, and you cannot do it by stealth. Also, our sizeable community of reform sceptics is now more vigilant and, more significant, within the establishment. So all reform today will be hard politics. Telecom was the first test, and you have to give credit to the Manmohan Singh government for managing it quite brilliantly. He stayed the course without rushing things, got the Left to say several times at UPA coordination meetings that they had no problem with FDI in infrastructure, and then clinched the argument because telecom was, after all, infrastructure. With this, two of the three FDI increases promised in the last budget have been met. The third, on insurance, is trickier because it directly interests the Left parties because of their hold over the public sector insurance employees’ unions. This is pure politics and will have a stronger pull than ideology or xenophobia.

But could Singh clinch this too by arguing, quite logically, that insurance is infrastructure too, social and financial infrastructure, in fact? That India is a hugely under-insured country and the worst sufferers are the lower middle class. That in so many ways insurance is like telecom. The needs of the Indian market are humongous, and as with telecom, it will take both the public and the private sector to take India anywhere near the kind of spread that it needs. Deeper insurance reform and arrival of larger capital, domestic and foreign, could increase the numbers of insurance buyers in much the same way as telecom reform has done for telephone users and connectivity, and so on.

At Davos last week, businessmen from around the world listened in fascination to Pakistan’s Prime Minister Shaukat Aziz as he revealed his own vision of reform. Nearly 90 per cent of banking in Pakistan, he said, had already been privatised, resulting in massive declines in NPAs and quadrupling of rural and agricultural credit in about five years. His oil PSUs were all being fully privatised, a regulator being set up. He had just put his national telecom PSU on the block. His airline, PIA, was going to be sold too. “We do not believe the government should be running any businesses. We have no insecurities,” he said. He even said his government did not feel constrained in this by the fact that many of his PSUs were too big for investors to buy a majority stake right away. They can buy 26 per cent now and take management control, he said; they could raise the money to acquire a majority stake later. He counted the very impressive achievements of this reform. A growth rate of 7 per cent this year on the back of 6 last year, interest rates all below 5 per cent, airline and hotel waitlists, fresh investments in energy and infrastructure.

In comparison, the same tycoons would obviously find the Indian view much too convoluted and ask why we were so “trussed up” compared to the Pakistanis. What they find difficult to understand is that Pakistan is able to do all this because of its suspension of most of its politics. Such a thing is never possible in India, even less so in a coalition situation. What can be done through executive fiat in Pakistan has to go through a process of political debate and bargaining in India. “Your problem,” people would tell you. But on the plus side, what you get through this painful process is permanent, not easily reversible.

The two major reforms announced in the past six weeks, telecom FDI and permission to private airlines to fly overseas, fall in this category. The NDA had tried to push both through by stealth. Both fell to the BJP’s own internal contradictions at the cabinet level and it has now taken exactly one more year for these to be implemented, with compromises. But now, there is very little protest across our political system. It is likely that the same complex process would now lead to airport concessions being given out by this summer, energy and banking sector consolidation and the creation of an infrastructure bank or some kind of a special purpose vehicle to finance big infrastructure projects. Chances are, Dr Singh will follow the telecom route of engagement and debate, and if he is able to achieve these major objectives in 2005, you’d have to acknowledge that this economist has learnt politics as well. Telecom and aviation are a cracking good beginning to the year.