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Corporate Dec 26, 2012

How govt and business behaved out of character in 2012

By R Jagannathan

There could not have been a more topsy-turvy or less predictable year than 2012.

What we thought would happen did not happen; what we didn't think would happen, suddenly became a reality. The India story is trying to make a second coming, with the last three months of the year achieving more than the first nine.

Who could have predicted at the start of the year that Pranab Mukherjee would not be finance minister by the middle of the year, and would instead be the President of India?

Business is turning topsy-turvy too, with the unexpected grabbing the eyeballs. Reuters

Who could have predicted that Sonia Gandhi would have embraced economic reform after avoiding it for eight years in UPA-1 and UPA-2? What made her restore some power of decision-making to the dream-team-turned-nightmare of Manmohan Singh and P Chidambaram in order to rescue the Indian economy?

Who could have predicted that a country used to treating the rich and powerful as beyond criticism will, by the end of the year, be daring to accuse all of them of corruption and loot? From Sonia Gandhi and her son-in-law Robert Vadra to the Ambanis, it's the same story.

Who would have thought that an RTI activist called Arvind Kejriwal, whose anti-corruption movement under Anna Hazare's leadership fizzled out last year, will emerge in an avatar and send shivers down the spines of the high and mighty in 2012?

Nothing illustrates this destruction of reputations better than the libellous song in Prakash Jha's Chakravyuh, titled Mehngai. One verse in the song runs like this: Birla ho ya Tata, Ambani ho ya Bata, Sabne apne chakkar mein, desh ko hai kaata. Such a song criticising the most powerful businessmen in India would have been unthinkable even 10 years ago.

Despite the song, who would have thought that the Tata group will be run not by a man whose surname is Tata, but someone called Mistry-Cyrus Mistry? By the end of 2012, Ratan Tata had handed over power to a non-Tata.

Business is turning topsy-turvy too, with the unexpected grabbing the eyeballs.

The Tata name is now global, and that means Indian business has to share the joys and sorrows of the world. Who would have thought in 2011 that Tata's global acquisitions would bring both profits and losses? In Tata Steel, the acquisition of Corus in Europe is leading to losses; in Tata Motor, the acquisition of Jaguar Land Rover is bringing in hefty profits at a time when the Nano has not worked so well.

Who would have thought that even Mukesh Ambani will be thwarted by a petroleum minister on his Krishna-Godavari offshore gas investment plans? Who would have thought that his brother Anil Ambani would be struggling with his companies' debts when Mukesh is sitting on over Rs 80,000 crore of cash, unable to invest quickly enough?

Who would have thought that Vijay Mallya would be turning business logic on its head? That he would kiss goodbye for his most profitable business (a majority stake in United Spirits to Diageo), and use the money to keep a losing airline business afloat on hope and little else?

Who would have thought that instead of government disinvestment, business would be the one leading the disinvestment bandwagon. From the Biyanis to Tatas to Bharti to DLF to Kingfisher to Suzlon, big business is selling parts of its non-core assets to deleverage.

The big question towards the end of 2012 was this: why are even cash-rich companies unable to invest? What is holding them back? The answer, obviously, is the unearthing of various kinds of scams, which made government officials and ministers more focused on dealing with allegations than economic decisions.

Who would have thought that in 2012 the 2G spectrum scam will be overtaken by other scams that would make even A Raja look like an amateur? During the year, we had the coal blocks allocation scandal, the Robert Vadra land-grab, the Sonia-Rahul takeover of Associated Journals, the Nitin Gadkari Purti scandal, and many, many more scams that made us forget 2G.

Who could have believed that the Supreme Court, and not the government, would have such a big role to play in economic policy in 2012? In January 2012, the Supreme Court said the government had no right to collect Rs 11,000 crore from Vodafone as capital gains tax for buying Hutchison's India mobile operations.

In February, it cancelled 122 telecom licences issued by A Raja and said auction was the best way to sell scarce natural resources -forcing the government to hold an auction for spectrum in November. On a presidential reference from the government, the Supreme Court agreed that not all resources need be auctioned, but the government will hesitate to avoid an auction in future after the 2G disaster.

But by far the biggest turnaround of 2012 is the swing of the Congress party towards reform after avoiding it all along.

The reason for it, of course, is the deteriorating performance of the Indian economy on all fronts-growth, exports, inflation, budget deficits, everything.

Who, for example, would have believed it possible that inflation will continue to remain above 7 percent for so many years, and with few signs that it will come down?

Who would have thought that gold would cross Rs 31,000 per 10 gm, as people saw inflation eroding their real savings?

Who would have thought that the rupee would touch Rs 57 to the dollar during the year after ruling in the 44-46 range in early 2011?

Who would have thought that Manmohan Singh, who rescued the economy in 1991, would have landed the economy back in the same mess- external and internal deficits-20 years later? Rising budget deficits, rising external trade deficits, falling rupee, soaring inflation and interest rates, slowing growth, and an empty treasury?

The crisis has brought the tiger in everybody.

Who would have thought that the same man appointed by P Chidambaram as Reserve Bank Governor in 2008-Duvvuri Subbarao-will repeatedly refuse to oblige his former boss on cutting interest rates?

All these signals must have helped Manmohan Singh finally convince Sonia Gandhi that the economy cannot be rescued without real reforms.

Otherwise, who would have thought that despite being scared politically, the Congress would raise the prices of diesel by Rs 5 a litre in September and limit the supply of subsidised LPG cylinders to six per family? (This may now be raised to nine).

Who could have expected the Congress to risk its government to back foreign direct investment (FDI) in multi-brand retail? Even after the loss of support from Mamata Banerjee's Trinamool Congress, the FDI in retail law was not only cleared, but also given parliamentary approval by both the Lok Sabha and the Rajya Sabha. FDI did not need parliamentary approval in the first place, but now it will be impossible to cancel it without another parliamentary vote.

That the return to reforms has begun to turn around economic sentiment is clear from the way the stock markets rebounded in the last quarter of the year.

Without the reforms, would foreign institutional investors (FIIs) have invested nearly $30 billion in stocks and debt in 2012 (around Rs 1,60,000 crore)?

But the FIIs had begun investing in India even before the reforms. Would they have done so if the US and Europe had been growing well? More than the pull of the India growth story, it was the push factor of zero-growth Europe and zero-interest rates policies of the US that forced investors to come to India and invest both in stocks and bonds.

It is, however, only the scent of reforms that will keep the money here. If the reforms don't continue, the FII money will evaporate.

And the reform that looked most likely to be implemented around the end of the year was the politically rewarding one of subsidy reform. The Congress party wants to gradually replace subsidies in food, fertiliser and fuel with cash-through direct cash transfers to beneficiaries, using the Aadhaar Unique ID Card.

Who would have thought that Sonia Gandhi and Rahul Gandhi would buy this right-wing proposal when their own advisors at the National Advisory Council-including Aruna Roy-have been advocating caution? Who could have predicted that Sonia Gandhi would stop listening to her own creation, the NAC, and listen more to reformers such as Manmohan Singh and Chidambaram?

Like the nuclear deal in UPA-1, Sonia Gandhi's change of heart after the exit of Mamata Banerjee suddenly restored life and credibility to the Manmohan Singh's government. After more than three years of negative perceptions and zero achievement, the UPA-2 government has been brought back to life.

How long with this rejuvenation last? Will 2013 see a continuation of the last three months' purposive action, or will the UPA slide back to political games and populism? Will the victory of Narendra Modi in Gujarat energise the Congress or make it more afraid to take risks?

The events of 2012 tell us that it is better to fight for what you believe in than staying afraid of doing the right things for fear of losing popular support. Good economics has proved to be vital for good politics. The tragedy is that it took UPA-2 more than three years of failure to realise that.

Who would have thought at the start of 2012 that the Congress party would have learnt this lesson the hard way? That's the miracle of the year.

India, they say, reforms only in a crisis. UPA-2 has learned to embrace reform after bringing the country to a 1991-like crisis. The UPA is by no means a convinced reformer, but at least it has made a start. 2013 will tell us whether it is a real start or a false one.

(This article was originally written for Dainik Bhaskar)

by R Jagannathan

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