Devangshu Datta: Balancing act

BEATING THE STREET

Most politicians have a superstitious streak. So do most sportspeople, actors and entertainers. It's understandable in these professions, where success often depends on factors beyond individual control.

Investors face similar problems: it's not enough for an investor to be good, he must also be lucky. A smart, prudent, diligent investor who's a wizard at picking businesses will still be a loser in times of depression or war.

Dr Manmohan Singh must be wondering if he's going to be lucky. He's inherited an economy that's not doing badly "" but it's beset by problems beyond his control. The Iraq quagmire ensures that global crude and gas markets will remain disturbed. That in turn means India will not be able to cap inflation.

In addition, the UPA must contend with messy coalition politics. Urgently required reforms and structural changes will be blocked by the Left as a matter of principle. Labour practices can't be improved because trimming or disciplining workforces would provoke loud screams. Thus it's hard to improve operational efficiency in airports, ports, railways and sundry PSUs.

As to subsidies, the most the UPA can do is make them explicit. An explicit subsidy is better than an implicit subsidy but it's still a free lunch. For example, if free power is supplied to farmers, it can be metered and paid for from the respective state government's budget.

That means SEBs aren't pushed into bankruptcy and investment into the power sector doesn't disappear. It also means that resources continue to be allocated inefficiently.

Over and above these, Dr Singh's biggest problem could simply be the cyclical nature of economic growth. The Indian economy had a good year in 2003-04 and it should have another good year in 2004-05. Beyond this, a drop in growth rates looks certain.

Even with the stockmarket at the current moderate price-earnings ratios, it's tough to find sectors likely to register higher growth beyond 2004-05. The second half of 2004-05 is likely to see growth maintained close to current levels.

Beyond that, all projections suggest slowdown even in high-growth areas like teleconnectivity and computer penetration. The long-term behaviour of the economy also suggests cyclical downturn in 2006. The usual combination of demand saturation and supply bottlenecks will come into play.

If the UPA can work out its coalition muddle by 2005, it may be able to smoothen out the coming downturn by implementing some reforms. If it can't sort out internal differences, we'll be left with no recourse but to pray for the twin blessings of Iraqi stability and a good monsoon.

There is much however that can be done within the parameters of the CMP. Customs/excise and IT rates could be simplified to eliminate absurdities.

Just as examples, there is differential treatment on imports of cat-food versus dog-food and on left-hand-drive cars versus right-hand-drive cars. And in several manufacturing sectors, the raw material has a higher duty than the finished product.

Policy that has been cleared in principle could be implemented quickly. Put in regulators in the energy sector; don't dilly-dally over airport bids or pending changes in convergence policy. And try and speed up the policy-making process itself "" in the long run, that's critical.