UPA 1.0 Vs. UPA 2.0: LEFT REALLY LEFT OUT?
By Adhvith Dhuddu
You don’t need a rocket scientist to decipher the capital markets’ vicious reaction to our FM’s highly anticipated budget. With expectations sky high, which were reflected in the May 18th jumbo rallies, our FM under delivered on numerous aspects disappointing many stakeholders. Whether its investors, industrialists or the aam admi, but for the scattered green shoots, the broad strokes painted in the budget lacked the transformational and reformist tone that was required of Mr. Mukherjee. After the Left was left out, and the UPA launched its revamped 2.0 version; the towering expectations of a reformist UPA have been put to rest, at least temporarily.
The budget’s indifferent tone coupled with an unenthusiastic reception leaves one wondering if the Left was just a scapegoat in UPA 1.0 from ‘04 to ‘09. It’s imperative that the electorate ask this question because change has not come when the people demanded it. Voters couldn’t have sent a stronger message than by voting out the left parties who were vociferously obstructionist in nature, gleefully blocking every reform oriented policy initiative.
The primary culprit of this budget was the lack of details which the markets debunked almost immediately, sending the major indexes into deep red. So how can one accurately answer that question? Very simple, let’s explore if any major policy measure that the left would have blocked has been implemented.
FDI in banking, retail and insurance: Something that the Left parties vehemently opposed, fearing that outside competition would be detrimental to local industries. With the Left gone, there were high expectations that deregulation in these sectors would be initiated. But no concrete details were given in this segment.
PSU disinvestment: Another area that the Left strongly opposed believing the classic communist view that government is the best institution to run an industry. The prospect of moving forward here was very high as many analysts expected cash flows from PSU disinvestments to help pad the fiscal deficit. But again, besides a brief mention, little details were imparted in the FM’s speech.
Fuel Policy: Everyone’s aware of how the Left consistently voiced their irrational criticisms when fuel prices were hiked even a rupee or two. This budget was a golden opportunity for our FM to introduce sweeping policies to incentivize efficient use fuel, to encourage alternate energy companies, or to tax high polluters, all of which would’ve drawn the Left’s criticism. He could have leveraged this tremendous opportunity to provide an energy vision for India but failed to deliver from the pulpit.
Although these are just a few areas where UPA 2.0 could have initiated reforms, it clearly reflects the lack of political will to make bold moves in this opportune environment. While it’s true that the stock market is not the ideal barometer to measure the budget’s outcome, one has to pay attention to the markets as it was biggest post-budget drop in Indian history. Not only is it disappointing to realize that the Left was a scapegoat in UPA 1.0, but it’s also unfortunate to watch the Congress continue along the lines of UPA 1.0, lacking the ability to make bold moves, devoid of the required political will.
Also, few have dared to ask one tough question: What if we do stimulate, sending the fiscal deficit to 6.8 percent or higher (adding off-balance sheet items amplifies the deficit), and growth is still at moderate levels between 6-7 percent? That situation could be severely precarious for the Indian economy as the FM will then have to tackle a rising fiscal deficit, moderate growth, diminished receipts and India could fall prey to credit downgrades by international rating agencies. This outcome, which could be extremely detrimental to the economy, is very likely as the FM’s plan is a conditional one. A condition that growth will creep back into the Indian economy and the world economy will slowly pick up momentum.
I ask this question because although bold moves are required in this environment, it cannot be at the cost of fiscal prudence. Claiming that more money in the hands of the consumer will lead to higher spending is valid if you are in the United States, but the mindset of the Indian is to save more and spend only moderately. Given the gloomy environment, more individuals will be looking to pad their own bank accounts not someone else’s.
Overall this Budget is a relative disappointment because the FM has failed to capitalize on newfound popularity of the Congress party. A bird’s eye view of the budget lacked the needed lucidity in many reform areas, skipped the concerns about delivery mechanisms, has been blithe about FRBM targets, and was devoid of any visionary message or statement for the next five years of UPA 2.0
(The author is an asset manager and professional trader.)
