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Sunday, Sep 22, 2002

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S&P's wake-up call

Raghuvir Srinivasan

AS with every downgrade, much heat and dust has been raised by the latest one of India's rupee debt rating to junk grade by Standard & Poor's (S&P). There are the usual arguments about rating agencies and their motivated actions as also the defensive ones about how the economy is not really as bad as it has been rated to be. S&P does seem to have erred in its assessment this time round, though, going by the macro-economic numbers alone.

The first half of this fiscal has shown encouraging signs of a turnaround what with critical sectors such as automobiles, steel and cement showing a positive growth. In fact, industrial growth, at 4.7 per cent, is almost double that of the same period last year. Exports have also registered a sharp 15.2 per cent rise compared to a negative growth last year. Inflation is well under control. Most economic variables are showing positive trends though GDP growth is itself projected to be lower than the initial estimate of 6 per cent. This can be put down to the indifferent monsoon this year which left the first sowing season high and dry.

Yet, for all these positive features, there is one big negative factor that may have influenced S&P's rating assessment — the stalling reforms programme of the Government. Just look at the unfinished reforms agenda.

There are at least three major Bills that have been hanging fire for more than a year now but are yet crucial to their respective areas. The Electricity Bill, which is expected to clear the way for much-needed reforms in the power sector, is pending in Parliament for more than two sessions now. Ditto the Competition Bill which will pave the path for setting up of the Competition Commission of India.

The Petroleum Regulatory Authority Bill has been referred to a standing committee which means that it has been consigned to the freezer. The deregulated oil sector presently has no regulator to ensure the orderly operation of free market forces. There has been some forward movement on the liquidation of the outstanding dues of state electricity boards to the central power utilities . Yet there is a lot more to be done in the areas of privatisation of distribution, direct selling of power and so on, which await the passage of the Electricity Bill. The manner of exit of Mr Suresh Prabhu, who was spearheading the reforms programme creditably, raises fresh doubts over the commitment of this Government to power sector reforms.

The Government may have carved out a package for Unit Trust of India but there are others waiting in the wings, notably IFCI and some say, even IDBI which is in a spot of bother with its commitment to the Dabhol power project. The IFCI issue has been dragging on for too long now and by not addressing it squarely, the Government has only been postponing the day of reckoning.

And then finally, of course, there is the disinvestment debate that has sprung up in the last one month. The developing consensus across the political spectrum against privatisation, especially of oil companies, bodes ill for the Government's disinvestment programme. More than the hole that a failed programme may cause in government finances, what should be worrying is the tendency of administrative ministries to go to any lengths to hold on to the PSU's under their control. Look at how Mr Ram Naik is willing to even subject BPCL to a public issue of shares (for funds that are absolutely unnecessary) just to delay or spike its privatisation. Such tendencies catch up rather quickly, as it indeed has with other Ministers now, and could eventually derail the privatisation process itself.

The ongoing controversy over the inter-connect agreement between VSNL and BSNL/MTNL is also a bad advertisement for the privatisation programme.

The VSNL controversy points to the inherent difficulties in privatising core sector companies — there could be any number of minor legal issues that tend to get overlooked at the time of the transaction only to assume troublesome proportions later.

The Government, in such cases, has to act as the facilitator to smoothen the path for the buyer rather than turn adversarial, placing fresh hurdles, as it is doing in the VSNL case. In sum, the macro-economic fundamentals appear healthy but for them to remain that way the Government has to get on with its reforms programme.

The downgrading by S&P, unjustified as it is, would still have served its purpose if it propels reforms back to where it belongs — at the top of the government agenda.

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