Economy: Good governance will help! - Views on News from Equitymaster

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Economy: Good governance will help!

Aug 19, 2004

As we have seen in past few months, sentiments in the Indian stock markets have taken precedence over fundamentals in the short term. After touching record highs of 6,123 in the month of January, markets finally started sinking due to political apprehensions regarding which party will come into power and once this was evident, the continuation of the reforms process further spooked the markets. In this backdrop we conducted a poll on our website asking investors their perception about the new government in light of the recent measures taken by the UPA (United Progressive Alliance) government?

Of the total votes received, around 38% voters had a positive view towards the government's reform process, while 28% were neutral, a higher 34% were not so happy. So a mixed opinion overall!

Soon after resuming power, the UPA government came out with the six point program mentioned below in which they have talked about achieving 7% to 8% GDP growth over a decade, providing employment opportunities to people in rural areas, thrust on welfare of farmers, etc.

  1. To preserve, protect and promote social harmony.

  2. Ensure that the economy grows at least 7-8% per year in a sustained manner over a decade.

  3. To enhance the welfare and well being of farmers, farm labour and workers, particularly those in the unorganised sector.

  4. Fully empower women politically, educationally, economically and legally.

  5. Provide for full equality of opportunity, particularly in education and employment.

  6. To unleash the creative energies of our entrepreneurs, businessmen, scientists, engineers and all other professionals and productive forces of society.

The program sounds convincing because until rural India develops, higher GDP growth will not be sustainable for long. The fact that if there are enough employment opportunities, the per capita purchasing power will also improve, which in return will help the consumer driven industries to grow. However, what remains to be seen is that, is there any long-term vision behind this motive or is it just a way to please the larger chunk of the vote bank.

Certain measures such as the distribution of free electricity to farmers by some of the congress led state governments is definitely not in sync with the reforms in the power sector as envisaged in the Electricity Act 2003. If there is real intention to support farmers then they should be provided with better technology for farming. While, it may be too early to judge the actions of the government, doling out of such subsidies (which provide only a short term solution) does not augur well for the image of the government who has stated that the control of fiscal deficit is one of its foremost priorities. It may be wiser on the government's part to slowly and gradually make farmers independent. However, we believe if the focus on the development of rural India introduced by the government is carried out well, it can be big positive for the country in the long run.

As far as industry is concerned, by proposing a hike in the FDI limits in sectors like telecom, civil aviation and insurance, the UPA government has shown openness to foreign capital (again in line with the CMP), though some of its allies have already opposed these proposals. But bold steps like increasing domestic oil prices in line with the rising international crude prices and removal of subsidy on the cooking gas to some extent has shown the intentions of the government to carry reforms. Also the government has restated that it will continue to invest in the infrastructure projects, which is likely to support GDP growth over the long-term.

From a broader economy perspective, if the government is able to implement its policies in areas like the continuation of thrust in infrastructure development, addressing fundamental issues like poverty, education, rural development and healthcare then the targets set in the CMP may be met. At this time 'intention' is not the area of concern, 'action' is. How the new government manages to placate its allies and at the same time carry out crucial economic reforms remains to be seen.

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