The economic outlook for India has just turned a little negative. Three factors have contributed to this: continuing high global oil prices; the verdict of the mini general elections just over; and the way the mind of Sonia Gandhi seems to be working.
On the face of it, the popular verdict in the assembly elections should please the Congress no end. The BJP, still the principal opposition, has performed just about the worst. It is not as if those running the Congress are not feeling rather contented.
Party President Sonia Gandhi has thought the moment right, particularly after the icing on the cake provided by her Rae Bareli win, to announce that heir apparent Rahul Gandhi will move up one rung in the party hierarchy. But what is good for the Congress party need not be good for the country or its economy.
The BJP sinking deeper into morass is not bad news but the left leadership thinking that it has secured a popular mandate for its brand of policies is. This is doubly so because if you go by the issues that dominated the campaigning for the elections, no such endorsement has been given.
The popular verdict in Kerala has been foremost against the factionalism that prevented the United Democratic Front from running a credible administration. There has also been a strong anti-incumbency factor at play in a state which has traditionally opted for one formation and then the other every five years.
If we recall how the intellectually bankrupt agenda of the E K Nayanar administration was thrown out five years ago, it is not difficult to see what is likely to happen after five years with a very old man at the helm with a wholly conventional agenda. At a time when there is intense competition among states to attract investment, which alone can create jobs and fetch votes, the future belongs to aggressive doers like Rajaskhar Reddy and Buddhadev Bhattacharjee.
In West Bengal, Bhattacharjee has won on a clear reform agenda and the Left Front's main challenger, the Trinamool Congress, led by Mamata Banerjee, is perceived to have bitten the dust because she had no credible alternative to offer. Being a party in alliance with the BJP and sans any left intellectual baggage, she could well have made bringing investment her major plant in a state desperate for urban jobs. Instead, she allowed Bhattacharjee to run away with the colours.
That is ironic, but nowhere near as much as the left winning a landslide victory in West Bengal on a reform agenda and the left leaders at the Centre using that victory to flex their anti-reform muscles with greater vigour.
The elections have turned the prospects for reform a shade dimmer when urgent action is needed on at least one issue, domestic oil prices. A continuing massive hiatus between them and international prices is inversely proportional to fiscal health as also that of the oil-marketing behemoths, which were till not so long ago the performing poster boys of the public sector. Even after most of the global oil price rise is passed on domestically, their adverse impact on the buoyant prospects for the Indian economy will have to be countered. Not to raise prices will be doubly bad.
The third and perhaps the most disturbing reason for a downward shift in immediate economic prospects is the mind of Sonia Gandhi, as revealed in her letter to Manmohan Singh. In it she has come out in favour of slower opening up to the rest of the world, at a time when negotiations with ASEAN are on for a broader free trade area arrangement, and more effective domestic policy measures to protect and strengthen growers and manufacturers. This seems to be a case of legitimate politics leading to bad economics.
The Congress president is right in fearing that the lot of the Indian farmer has not got any better under the UPA regime. She is also right in feeling that a government cannot hope to return to power unless large numbers of ordinary people clearly feel better off. But she errs in offering the same prescription for both agricultural and industry.
If there is any bitter medicine that has done wonders for Indian business then it is the lowering of protective barriers since 1991. In responding to it India Inc has reorganised itself to measure up to international benchmarks. In the process it has acquired a new competitiveness, on which is founded its current confidence. This has emboldened it to go in for extensive carefully selected acquisitions around the world.
It is silly to do this, on the one hand, and ask for domestic protection, on the other. The left leadership, being status quoist, sides with the protectionist businessmen. The Congress should know better.
These negative straws in the wind need not cause serious damage. They may end up lopping off a percentage point from growth -- 6.5-7 per cent instead of 7.5-8 per cent. A huge amount of reforms can still be carried out within the new constraints and downsides. If there is an appreciable improvement in water harvesting and the employment guarantee programme can be made to work, there can be a decisive impact on both rural produce and rural mood. Plus, a toning down of sentiment at a time when asset bubbles are clearly emerging may turn out to be a positive thing.
But the negative impact of persistently high oil prices, the left's ability to exercise power without responsibility in coalition politics, and inadequacies of Sonia Gandhi's economics should not be underestimated.