Commentary/Yazad Darasha

The 12 Labours of Chidambaram, III

In this final edition of the Labours of Chidambaram, we present the final four tasks that Finance Minister P Chidambaram may need to perform, like Hercules, to prove himself.

Revamp FERA: A lot of the arguments on the taxation front (covered last week) would extend to the Foreign Exchange Regulation Act as well. Here too, it may be relevant to note that the accent should be on stricter regulation, rather than mindless closure of most avenues.

As an example, the ITC FERA violation charges have brought into sharp focus the need for perestroika to allow more foreign exchange outflow. Traditionally, Indian companies have had no way to access dollars outside India. And any company would be able to tell you in no uncertain terms that in order to export, a cache of foreign exchange kept abroad is absolutely essential.

At the bottom-most rung of the ladder, dollars are needed simply to take a prospective foreign client to dinner at a good restaurant in, say, Washington. Without this basic minimum, exports, and consequently domestic production, are going to suffer.

Again, that does not mean that a company has the right to break the laws it sees as inconvenient. It means the finance minister needs to realise what the grassroots realities are and free more and more parts of our exchange regulations. At the same time, vigilance can be strengthened, to see that the liberalised laws are not broken.

The Reserve Bank and the finance ministry have both put forth various reasons why the rupee should not be made fully convertible, even on the capital account. There isn't one reason from so many that really holds water. Perhaps the authorities are putting in place a better vigilance mechanism before the convertibility is announced. One hopes so.

Enable Foreign Equity Inflow: Talking about dollars, Chidambaram seems to have pinned a large chunk of his hopes on the inflow of foreign direct investment, to provide the spark needed to get the economy into high gear. His figure of a total FDI inflow of $ 10 billion may sound a little wishful, but the reality would appear to bear him out.

The actual FDI inflow between April and September 1996, was Rs 38.47 billion, 29.44 per cent higher than the inflow in the same period of the previous year. The higher inflow has shored up the country's foreign currency assets, which stood at $ 19.33 billion as on November 8, 1996. This is an increase of $ 1.84 billion over the reserves position as on November 10, 1995.

However, transparency is the name of this game, if the inflows have to continue. Just as an example, the Foreign Investment Promotion Board approves the Tata-Singapore Airlines joint venture with a 40 per cent shareholding by SIA. The civil aviation ministry says nay. The latter goes as far as to tell Jet Airways -- by far one of India's best managed private airlines -- to roll back the equity holding by Kuwait Airways and Gulf Air. Continue Stock Market Reforms: Indian finance ministers have of late smiled enigmatically whenever the stock market is mentioned, and said ridiculous things like: "I do not lose any sleep if the stock market loses a few points", or "Why should I let a few fluctuations in the stock market bother me?" This changed when there was an almost national uproar over the stock market's prolonged bear phase.

India's premier stock exchange, the Bombay Stock Exchange, hit a three-year low on December 4, 1996. The primary market is also down. The market prices of many companies which have very long-term strong fundamentals have also fallen drastically to their three or five year lows.

And Chidambaram has been forced to sit up and take notice. Because whatever anyone may say to the contrary, the stock market is the one reliable gauge of what is happening on the macro economic scene, and how that is affecting life at the micro level.

It is heartening that Chidambaram -- as well as Prime Minister Hardanahalli D Deve Gowda -- has finally seen the light and decided to introduce measures that would boost the stock market. The two worthies do not need to worry. The market will rise on its own if they take measures to boost the overall economic and corporate scene. But the market will fall if it perceives the government to be just one more in a long line that wants to get as much mileage as it can out of its years in office, economy and nation be damned.

Steps that would certainly provide a fillip are the removal of absurd taxes like MAT that make years of tax planning redundant; a genuine effort to cut government spending; rationalising the tax structure to do away with any double taxation including the dual tax on corporate dividend; etc.

And finally,

Evolve A Long-Term Game-Plan: The five-year history of liberalisation and economic restructuring in India is replete with knee-jerk reactions to events as they occur. It would be a tremendous feather in Chidambaram's cap if he sets up a high-powered committee to evolve a well-thought-out five-year game-plan for the Indian economy, based on representations from all the sections of Indian society -- from the richest to the poorest.

Every Budget is preceded by meetings with industry chieftains, industry association heads, and other experts of all hues. There is an urgent need to broadbase these meetings to include the suggestions and demands of the common man as well. The committee can do that at leisure -- say in a time frame of six to eight months, in time for the presentation of the next Budget.

This will ensure that the plan that evolves is scrupulously fair and that there are no anomalies that will need to be rectified on a knee-jerk basis later on. More important -- from the government's point of view -- it will also give the government the support of all the voters and vote banks, maybe even win the next election for it.

For such a plan to evolve and succeed, it will need a majority sanction from Parliament, along with the caveat that it is adhered to by succeeding governments to the extent made possible by circumstances. Now isn't that the idea of governance in the first place?