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Home > Business > Special

Move, and make way, politician

Surjit S Bhalla | March 03, 2007

The headline "Defying FM's call, Cement Companies Raise Prices" will go down in Indian history as the most important economic event of the last seven years. There is an interesting debate going on in India as to whether India has graduated to a high-growth, mature, 8 per cent plus economy. Several, if not most, analysts claim that without additional reforms, the Indian GDP growth rate will inevitably fall to 7 per cent, or less. Some claim (and I am one of them) that the structural break has occurred, and that India is on to a new sustainable 8 per cent path -- and that there is precious little that the government can do about it. In other words, while the government can help accelerate GDP growth, its bad policies cannot diminish the future.

It is fairly safe to say that in terms of economic policies, the UPA government has been a disaster. To be sure there have been some initiatives, e.g. the attempt at modernisation of the retail sector, the introduction of SEZs, public-private partnerships as a method of financing India's ballooning infrastructure needs, etc. On the first two, the government, under the guidance and diktat of the leader of the Congress party, Ms Sonia Gandhi, has reversed course. The third, on extrapolation, may be facing the axe soon!

In terms of budgetary policies over the last three years, reforms are not even there to sniff it. We have had populist expenditure expanding without control; and highly questionable taxes being introduced, i.e. the fringe benefit tax and the cash transactions tax. In addition, tax rates have gone up in the form of surcharges and types of cess. The government, with much glee, has increased the cess on education from 0 to 1 to 2 to now 3 per cent. After this latest hike, the finance minister, with more than a hint of confidence, said "surely, if the people of India place their hand on their heart, they cannot grudge an increase in the education cess to 3 per cent". To which the rightful answer is, why not raise it to 10 per cent? One can easily cite the poverty, the crying need for health care, the desperation by which poor people send their kids to school as reasons to do so.

Emotional blackmail should not be an excuse for bad policy. Amidst much fanfare, Mr Chidambaram had stated two years ago that this government was as concerned with outlays as with outcomes. Sadly, the second part of the taxpayer-government agreement has fallen by the wayside. The assumption is: you must applaud our hearts (if not our minds) for spending on worthwhile endeavours.

Well, some people have spoken, and industry certainly has. The put-your-hand-over-your-heart tax�the increase in education cess from 2 to 3 per cent�has been immediately passed on to the consumer by a prominent public sector (i.e. the government and Mr Chidambaram is its leading light) firm, SAIL.

But the real coming of age of India, and the real beginning of the long-awaited decline of the politician, is signified by what the Indian cement manufacturers have done. This government has tried every bit of intervention; taxes that should not be there, diktats to the RBI that should not have been given, social spending without accountability or outcomes. This time, the FM tried something that was normal practice in India before economic reforms were introduced -- commands from the high command.

Using confused facts and even more confusing economics, the FM stated that Indian cement manufacturers were charging significantly above what he thought was a highly remunerative selling price of Rs 190 for a 50-kg bag of cement. So anyone selling cement above Rs 190 would pay an additional tax of Rs 12.5.

This was jawboning pretending to be economics. But for the first time in Indian history, industry did not ask: "How high should I jump, master?" (Indian industry leaders on TV were of a different league as several of them did not have the courage to call this a bad Budget, let alone a disastrous Budget.) Instead, the cement manufacturers, with no favours to ask, hiked their cement prices by Rs 12.5.

How high had cement prices gone up before the UPA measures to control cement price inflation? By the rate of inflation over the last six years! And at an annualised rate of 10 per cent over the last two years. Given that infrastructure is a crying need, a zero relative price increase of cement over the recession year of 2000-01 does not indicate any reason for the FM to censure the cement manufacturers, or try and control food inflation by forcing a decrease in the price of cement.

In the original reform government of 1991-93, Mr Chidambaram was known as a reformer. And in 1997, he did reform direct taxes. So the obvious question: what compels former reformers to turn tail? One answer -- the worst-kept secret of this government is that economic policy is not being made by technocrats but by Ms Sonia Gandhi and her advisers.

There is a to and fro in any economic debate, and in any political party -- but not so in feudal, dynastic parties. Otherwise, intelligent men and women apparently choose not to debate, let alone question, policies that go against the stated and publicised ideology of their supreme leader. This is not how policy should be made; and that is what cement manufacturers, public sector firms, and private sector capitalists are telling Mr Chidambaram, and Ms Sonia Gandhi. Nobody can force anyone to listen -- but the public can force the government to listen in a democracy. And maybe the public in Bihar, Maharashtra, Uttarakhand and Punjab is shouting to be heard.

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