Stay firm and a stronger government will emerge: India Inc. tells PM

India Inc. is throwing its weight behind the government’s reforms process even as UPA ally Mamata Banerjee has decided to quit UPA II.

“Mamata Banerjee has held the government to ransom for far too long. What she has done is not that surprising, because Ms Banerjee is the crusader of the poor. She plays the poverty card. I don’t think her sense of economic development is really about what the rest of the country wants,” Kiran Mazumdar Shaw, chairman cum managing director at Biocon, told NDTV.

“She has taken a stand, the government was half expecting it - may be not to this extent. But, so be it. Good economics never makes good politics. This is the time, when India is in a dire economic crisis and there is no option other than to take certain hard decisions.”

After Trinamool Congress chief Mamata Banerjee announced her party would no longer be a part of UPA II, Prime Minister Manmohan Singh allegedly reiterated his commitment to economic reforms, telling his senior ministers that the government "must stay the course" and that it has "an unfinished agenda" for the economy for which it will allow "like-minded people" to help.

Last week, the government announced a series of reforms. It responded to months of incessant criticism of its policy paralysis over a frenzied 48-hour period by hiking diesel prices and announcing foreign direct investment in multi-brand retail and aviation. Although the markets and India Inc. exulted, the UPA’s allies and the Opposition wasted no time in condemning the measures.

Foreign rating agencies such as Moody’s and S&P adopted a cautious approach, saying India has a history of being unable to implement reforms, to which Finance Minister P. Chidambaram said that reforms are meant for people and not rating agencies, adding that the government will not roll back either the diesel price hike or the new FDI norms.

The government plans to go ahead with more economic reforms, especially in areas where these could be done through its own executive powers, Law Minister Salman Khurshid told reporters late last night.

"The Prime Minister is leading from the front with the intention that the next two years are going to be very significant years for economic reforms. These are economic reforms, fortunately that have yet required any legislation, and these can be done without legislation," the law minister said.

At 5.5 per cent, India’s GDP growth in the three months to June languished near three-year lows, and was just above the 5.3 per cent in the preceding quarter. This was followed by a cut in India’s 2012-13 growth forecast by Morgan Stanley, which said that “in the event of continued inaction from the government, we see very high risk of a potential deeper macro stress scenario”. Later, rating agency Fitch said India’s “macroeconomic situation remains weak as growth is slow and inflation pressures are strong”.

The recent political developments will now only reinforce—albeit adversely—what the rating agencies have been saying: India's reforms are usually crippled by rollbacks.

“In the FM’s own words, it is going to be very difficult to contain fiscal deficit at 5.1 per cent of GDP. Exports are declining, FDI is declining; we have a trade deficit in excess of $70 billion. The offtakes are very dire in terms of investment. We have to find ways to create a good investment climate in India; without which we cannot even have a 5.5 per cent growth rate,” Ms Shaw said.

“Yes, we were forced to start all these reforms in one go. A phase-wise approach would have been better. But I don’t think the government had an option,” the Biocon CMD added.

Jyotinder Kaur, Economist at HDFC Bank, said: “We will have a stronger, bolder government as we have had allies holding back key government decisions. There is going to be significant action from the government in terms of policies and talk of a second round of reform measures is doing the rounds. If the government were to survive, and I hope it does, it will be a stronger, faster, more proactive government.”

Ms Banerjee has alleged that FDI in multi-brand retail would prove disastrous to India’s farmers.

“Everyone has been using the farmer’s plight for not supporting FDI in retail. Please speak to farmers. Please speak to the President of farmers’ cooperative – Mr Chengal Reddy -- he will tell you that every farmer wants investment. And he welcomes FDI if it helps him improve infrastructure, helps with livelihood. They have also told me they are mooting for privatization of irrigation, something that is going to boost agriculture. If you think about it, agriculture and manufacturing are the two sectors underperforming. Why? Because we need to build scale and won’t be able to do so without massive investment. FDI creates this scale opportunity for farmers and manufacturing,” Ms Shaw said.

Already, there is talk that Congress president Sonia Gandhi may try to  negotiate a compromise - while there will be no reversal of the retail reforms, the government may agree to a partial rollback in diesel prices, along with increasing the cap on subsidized LPG cylinders per household from six to nine per year.

“We urge the government to stand its ground. Right-thinking Indians will be less than amused by partisan politics in a fragile economy,” Anand Mahindra, chairman at Mahindra & Mahindra, tweeted.

Ficci president R.V. Kanoria said political parties need to understand the importance of economic reforms for the growth of the country.

"The country needs reforms, it needs to grow, it has potential, talent and entrepreneurial skills. I will urge those who are not supporting the reforms to think carefully," he said, adding that political differences must be set aside in the greater interest of the country.

“I don’t think good politics is equal to staying in the government by hook or by crook. So politics means that if you must lose your place in the government to do the right thing, then so be it. Honesty shows in your body language. I remember when I was young, I saw my uncle skipping a meal because Lal Bahadur Shashtri had asked the country to do so. That is the command of leadership. Unfortunately, today the problem is that if the government is doing something right, it is doing it nine years too late and has lost some credibility. But you need to start doing something. Do it without fear. If they go, they go,” consultant Sanjeev Aga said.

With inputs from PTI