Foot in mouth

India's communists need some elementary lessons in economics. First, this is a market economy and not a command system. Whether they like it or not, markets therefore are central to the way the system works.

Government intervention in markets should be the exception, not the norm, and prodded only by market failure. This was underlined when the stock markets, already skittish about the election results, crashed in one of their biggest one-day falls on Friday in response to some particularly unintelligent and poorly thought out comments by spokesmen of the Left parties.

The comment from the Left now got worse: the market crash was sabotage and would have to be investigated. That's the kind of conspiracy theory you get from unreconstructed Stalinists, the last of whom seem to survive in India.

Since the obvious has to be spelt out, it's better to do it straightaway. First, overseas investors have invested several billion dollars in India's stock markets, believing that India is on the firm path of economic reform and accelerated growth.

If that belief is shaken, the dollars will leave. That will bring about a stock market crash and send the rupee tumbling. Those losing the most in value are the public sector stocks which were to have been privatised, and which the Left wants to retain in government control.

The biggest loser is the government itself (and through it the people of India), since its own investment has lost value. The other cost will show up in terms of a reduction in the country's foreign exchange reserves "" and it is not clear what the Left thinks will be gained by that.

The other lesson to be given to the Left concerns disinvestment. The most obvious point is that when the government sells its companies, it gets money in return; it's not a one-way transaction.

Comments over the last three days have made it sound as though the government has been selling its companies in some kind of scandalous fire-sale.

This is easily checked, in terms of the accepted ways of valuing companies and finding out what they are worth. It is not difficult to establish in such a rational framework that the government has in fact got a good price on almost all its disinvestments; in this, it has done the general public a favour since the history of India's public sector is that it generates a return that is significantly lower than the cost of capital.

The arguments about reviving loss-making companies were demolished long ago by Arun Shourie, who documented how repeated and costly exercises in trying to revive the fortunes of troubled public sector companies had resulted in little more than throwing good money after bad.

India is capital-scarce and it cannot afford to continue going down this road. These are not ideological issues, they are matters of simple economics.

Spokesmen from the Left have also been arguing that they are in favour of reform, but not of the "IMF-World Bank" kind. What this means is not clear. India has not been under any kind of IMF loan discipline for the best part of a decade, and all that the IMF does is an annual review of the economic situation "" which it does for all its members.

The government is not obliged to listen to any IMF advice, or to act on it. As for the World Bank, India returns more money to the Bank than it borrows each year, and some high-cost debt is being repaid ahead of schedule. World Bank loans come with conditions designed to ensure that the money will be returned, but India does not have to borrow from the Bank if it does not want to.

It should be remembered, nevertheless, that India's domestic savings and investment rates are not high enough if it wants faster growth, and like all poor countries it has to import capital; World Bank money happens to come on better terms than most other sources provide, and Indian officials do a better job of negotiating the loans than their counterparts in most countries.

If India's Left wants encouragement, China too has been borrowing from the World Bank without seeming to suffer from such ideological sin.

Indeed, no country today thinks it can function while shutting out capital flows; India has done well to become more integrated with the global economic system, and to do so in carefully calibrated steps. There is opportunity in continuing down this road, not turning back.

Finally, the Left seems to have overstepped its brief in hitting the airwaves with policy positions on matters like taxation policy and foreign direct investment even before it is clear whether they will be part of the new government.

India's experience of coalition governments is now long enough for some guidelines to have evolved for appropriate conduct. First, the lead is to be taken by the dominant party in the coalition, in this case the Congress.

Congress spokesmen have waited to evolve a common minimum programme in consultation with their allies and supporters, and it is the normal experience that individual parties moderate their positions in order to get to some middle ground.

The Left would have done well to show restraint instead of pretending to be in the driver's seat though it has only 12 per cent of the seats in the Lok Sabha. The Congress was forced to respond by making some pronouncements aimed at damage control, but the damage has already been done. Now it will be a case of trying to retrieve lost ground.

None of this mitigates against trimming of the sails by the new government, nor does it mean that the government should not set new directions.

The emphasis that the Congress has placed on agricultural development and social welfare is well taken, as is its stress on creating employment.

What the country needs to see is that the party and the alliance that it leads have a coherent plan of action that (most importantly) can be implemented effectively, recognising the limitations of India's official delivery systems.

All the signals are that Manmohan Singh will once again be given charge of steering the economy. There is no one better suited for the job, though the country should be prepared to find that Dr Singh in 2004 is going to stress a different set of priorities than what he did in 1991.

That too is understandable; the economic situation is quite different today, and so are the challenges.