Even as the UPA is being increasingly seen as being frozen into inaction, which the former BJP Finance Minister Jaswant Singh described to me as “paralysis by analysis”, his solution once again knocks a few holes into the functioning of a capitalist system. On the other side, the Left parties are taking credit for India not being so badly affected as, among many other things, they prevented free convertibility of the rupee and blocked critical reforms in insurance, pensions and banking. Had they been passed, we are told, India would have been in deeper trouble.
Just outside the political circles, new loops are being drawn by companies, one industry at a time. Exporters are lining up to extract benefits from lack of liquidity and high interest rates on the one hand and dried-up orders on the other. And while higher interest rates hurt companies with a high debt in their books or businesses like cars or real estate that are dependent upon consumer credit for sustenance, there are demands to check the weakening of the rupee from companies that import raw materials.
This list is only the beginning of a flood. But so far are these demands going that I think those seeking government money or action to save private enterprises have lost their sense of perspective. Hardly a decade ago, the same entrepreneurs were demanding freedom from the government. In the absurdities of demands, my favourite is the setting up of a sovereign wealth fund to help prop up a stock market that has fallen by a third since September 15 and almost three-fifths since January 10. In other words, the government should use money that it can otherwise use for infrastructure development to bring the Sensex back to 20,000.
I am still wondering where this weird demand is coming from. A credible source told me that a lot of promoters have sold stakes in their companies to private equity investors at valuations that don’t justify current or future earnings or are based on internal rates of return. These deals have been signed on the assured assumption of a rising stock market. In case the market does not rise, a return of 15 per cent or so has been promised, from the personal coffers of the promoters, who in turn are banking on the market to rise and make good that deal.
The moral justification of propping up the Sensex by the government rides on the adverse impact it will have on the
fortunes of small investors. But with only 10.5 per cent of household savings going into the stock market through mutual funds in 2007-08, the impact of a market that has halved affects small portfolios only lightly, as most of the money is lying as deposits (56.7 per cent) and as cash (10.9 per cent) — or property. Last year saw Rs. 77,000 crore come into the market, against Rs. 415,000 crore in banks and Rs. 80,000 crore in cash. The fortunes of small savers are doing very well, thank you.
Stepping back, I find that if we go the bailout way, it’s a steep fall. Reducing banking constraints like the Cash Reserve Ratio or lowering interest rates will help the dried up financial pipelines move money again — so essential for any modern financial intercourse, leave alone a trillion-dollar economy like India’s. Focused fiscal measures that encourage weak sectors like gems and jewellery, auto components, capital goods could help kickstart private investments again.
But the demand for government money in private enterprises is fraught with risks, that have not been thought through:
* The only reason the government should think of capital infusion is to protect jobs — a politically sensitive issue that no leadership can ignore. Are promoters willing to walk that line? Or are they seeking easier sacking norms?
* If it is taxpayers’ money going to serve private interests, are we ready to see the government back in business, as an investor in private ventures?
* Stretch the argument a little and you see that the employer in a company becomes the investor there. So are we headed towards a new capitalism, where workers’ and investors’ interest converge?
* And if so, does it change labour dynamics in any productive fashion? Will, for instance, the Pay Commission apply to private workers? Who, then, will ‘pay’ for it?
* Will a public-private enterprise be yet another instrument of State policy, to be run by politicians and bureaucrats?
* What happened to the high risk that over-leveraged entrepreneurs, unthinking IPO chasers and flitting employees took when
they stretched their financial ambitions in search of a better deal? Is risk to be the domain of taxpayers and returns the right of individuals?
* If capital controls on the rupee have helped India come out of this situation less wounded, should other countries impose such controls and create a disunited state of the globe, where barter becomes the new currency?
We need to get answers to these questions before venturing into mindless bailouts. More so, because we are not so badly affected and have that luxury — a luxury that Iceland or Pakistan don’t.