First, on September 17, the government said it was considering upping the FDI (Foreign Direct Investment) ceiling in sectors such as telecom, insurance, even airlines.

Then, on September 18, it blinked and deferred any decision-and one seems unlikely-till the middle of October.

And on September 19, credit rating agency Standard & Poor's (S&P) downgraded India's rupee debt to the junk category, on par with the local currency debt of such super-achievers as Costa Rica, Guatemala, Kazakhstan, and El Salvador.

Events of the three days provided, at once, a demonstration of the ruling National Democratic Alliance government's ineptitude in matters economic, and the impact of the comatose state of the reforms process on the Indian economy. "Continued large fiscal deficits, along with a languid pace of economic reforms would lead to a further ratings downgrade," warned the S&P release.

The downgrade itself will achieve little, and the credit-rating agency has left India's sovereign rating untouched, but the 72 hours in question did prove-if any proving was needed-that the NDA has done with economic reforms for some time to come. Its commitment to modernising antiquated labour legislation, doing away, or reducing subsidies, and imposing user charges-together referred to as second generation reforms-have always been suspect, but the NDA did break new ground by instituting reforms in the power sector, and by disinvesting all or part of the government's stake in 31 companies to earn Rs 11,350 crore.

Unfortunately, power reforms died a quick death following the resignation of the man responsible for them, former Union Power Minister Suresh Prabhu. The fate of the government's disinvestment drive hangs in balance (there's a three-month moratorium on the privatisation of oil majors HPCL and BPCL, and there's no telling whether that of Nalco will proceed as planned). And with the next general elections scheduled for the middle of 2004, the government is unlikely to do anything in a hurry.

Shelly Shetty, Director, Fitch Ratings-an international agency which rates FIs, corporates and sovereigns-is downright skeptical. "The stalling of the privatisation process is an early casualty of the coming elections," he argues. "The window of opportunity to press ahead with politically sensitive reforms seems to be shrinking". Circa, September 2002, then, it is a good time to sing a requiem for the passing of reforms-the body is still warm.

The Madness In The Method

The turning point in the NDA's approach to reforms has to be the September 7 meeting of the Cabinet Committee on Disinvestment when, at the end of a four-hour discussion, the government decided to take a decision on the privatisation of oil majors HPCL and BPCL after three months. "This has cast a large shadow over the way investors perceive the government's commitment to disinvestment," says Indranil Pan, Chief Associate Vice President, Kotak Mahindra Capital Company. "Disinvestment was the key driver of the stockmarkets this year," adds a Mumbai-based investment banker. "Now everything, the fate of other PSU stocks, consumer confidence, the revival of some interest in the equity market, is gone."

WHERE HAVE ALL THE REFORMERS GONE? In its 44 months in office, the NDA has thrown up several champions of reform. Pity they haven't managed to do much

Arun Shourie: In 12 months starting August 2001, he effected the sale of all or part of the government's stake in 31 public sector companies. This, despite strong opposition from within the government. However, his opponents (and there are enough of them from George Fernandes to Uma Bharti to Sukhdev Singh Dhindsa to Pramod Mahajan to Ram Naik) have derailed the disinvestment process and effectively muzzled him. Suresh Prabhu: He changed the face of power reforms by getting state governments to realise the imperative of restructuring their electricity boards, but was unable to manage power-equations within his own party, the Shiv Sena, which instructed him to resign. His departure from the government has left a huge question mark over the future of power reforms in the country. Yashwant Sinha: India's much reviled former finance minister was, and remains a reformer at heart. It was during his stint at the finance ministry that the government opened the insurance sector to private companies, rationalised direct and indirect taxes, and thought about diluting its equity in public sector banks. Unfortunately, political compulsions prevented him from implementing many of his articulated policies and post some electoral reverses Sinha was shifted to the Ministry of External Affairs. Jaswant Singh: A strong advocate of economic liberalisation, Singh has still to make a difference in the finance ministry. Murasoli Maran: Shifting political equations in his home state, where his party the DMK was routed by the AIADMK in the last assembly elections seem to have eroded his status some. Still, the Union Commerce and Industry Minister remains a strong votary of reforms. Atal Bihari Vajpayee: A liberal, Prime Minister Vajpayee backed the process of economic reforms in general and Disinvestment Minister Arun Shourie in particular until political imperatives made it difficult for him to continue doing both. He has repeatedly articulated his desire to see the Indian economy grow at 8 per cent. However, as the head of a coalition government, there's only so much he can push, and recent events indicate that he has allowed electoral compulsions to overwhelm his own economic philosophy. Arun Jaitley: The former minister effected the sale of Modern Foods to HLL and brought about radical changes in the Department of Company Affairs. Unfortunately, his career as a reformer was cut short by the BJP's desire to have him all to itself-he is now General Secretary of the party. B.C. Khanduri: The Minister of Road Transport and Highways has managed to get the ambitious Golden Quadrilateral project-it links the four corners of the country-off the ground. Better still, he has managed to attract private sector participation in infrastructure.

Surely, the exit of one minister (Suresh Prabhu) and the delay in the privatisation of two oil companies cannot raise questions over the very continuation of the reforms process? After all, the privatisation of Nalco and Engineers India Limited is on schedule. The short answer to that question is that it can. "With the finance ministry taking a back seat in the reforms process, and very little happening in the other (economic) ministries, the Disinvestment Ministry had come to symbolise the vanguard of the reforms process," explains Saumitra Chaudhury, the chief economist at credit rating agency ICRA.

The agricultural sector may have done very well last year-it registered a 5.7 per cent growth compared to a measly 0.2 per cent growth the previous year-but it has hardly seen any fresh investment (and hasn't for the past five years). The government's investment in the sector has decreased, and in the absence of requisite agricultural reforms, private companies are loath to take up the slack. "Reforms allowing the free movement of grain across borders haven't been enacted by most state governments," says Subir Gokarn, the chief economist at credit rating agency CRISIL. "Nor has there been any legislation to allow large-scale contract farming; so why should corporates pump money into agriculture?" Why indeed?

In many ways, Prabhu achieved as much as Shourie did. In the 23 months he was power minister, Prabhu shifted the focus of power sector reforms from generation to transmission and distribution (T&D). And wielding the carrot of Rs 8,000 crore of grants-cum-loans, he forced the states (or at least some of them) to realise the urgency of cleaning out their SEBs (State Electricity Boards). Today, Prabhu is gone, Shourie has been muzzled and political exigency once again seems to have won over economic realities. The fate of big ticket disinvestments of mtnl, Air India and Indian Airlines, National Fertilisers, and the proposed Initial Public Offerings of GAIL and IOC isn't clear, but the Disinvestment Ministry is unlikely to achieve its target of raising Rs 12,000 crore this fiscal (it has so far done Rs 3,190 crore).

Second-Generation Rollbacks

In the short-term, the derailing of the reforms process means Finance Minister Jaswant Singh may find it difficult to meet his fiscal targets-reining in the deficit to 5.7 per cent of GDP, or achieving a 20 per cent increase in tax collections. And in the long term, it means that Singh will find it well nigh impossible to sell second-generation reforms to his colleagues in the government in his Union Budget 2003.

The new Finance Minister-he has been in power since July 2002-has announced a clutch of tax-sops for the middle-class and bailed out a couple of financial institutions. Clearly, the government is willing to sacrifice reforms at the altar of political necessity. That's a pity, because this is the right time to initiate economic reforms. The global economy is yet to recover from 2001's recession and the Indian agricultural sector has been hit, and hit hard by the delayed onset of the monsoon. Ergo, only aggressive economic reforms can offset these and sustain growth.

A TALE OF TWO GOVERNMENTS

Manmohan Singh: The original reformer Both the Narasimha Rao-led Congress government of the early 1990s and the ruling Atal Bihari Vajpayee-led NDA government have abandoned the path of reforms when it suited them to. Crisis engenders reforms. The threat of a 'payments crisis', of the country being unable to meet its external debt payments, forced Narasimha Rao's Congress government (Manmohan Singh was the finance minister then) into the reforms mode. And the lingering effect of the sanctions imposed following India's nuclear tests in 1998, motivated Atal Bihari Vajpayee's NDA government to consider "long-deferred structural reforms". Both governments did their bit for the open market, but only as long as it suited them. In 1994 and 1995, the Congress suffered serious electoral reverses in elections for several state assemblies, Andhra Pradesh and Karnataka included. In a knee-jerk reaction, the party decided that its commitment to reforms had cost it the elections. The NDA too, seemed committed to reforms, but following its dismal performance in most of the 32 assembly elections that have happened in the past 44 months, the Bharatiya Janata Party, the main constituent of the alliance, has had to rethink its reforms agenda. It doesn't help that several other members of the coalition are ideologically opposed to economic liberalisation. Need we say more.

The minor signs of a revival in the economy suggest that this may also be the right time to accelerate growth with some big-bang reforms: India's exports grew by a healthy 15 per cent in the April-July quarter of 2002-03, as against a negative 1.8 per cent in the same period last year; the Index of Industrial Production increased by 6.4 per cent in July 2002 as compared to 2.6 per cent in July 2001; and investment bank Salomon Smith Barney predicts that industry will grow by 3.1 per cent this year and by 4.8 per cent next year.

Any losses from India's reluctance to push ahead with reforms won't just be notional. "The stalling of reforms could lead to stagflation," says Kiran Nanda, the chief economist at cement major Gujarat Ambuja. "That's inflation without the corresponding growth and it is something the country can do without at this juncture."

Then, there's the small matter of the reaction of the global investing community. The S&P downgrade is a sign of things to come. The government's recent spate of disinvestments, believes Oxus Research's Surjit Bhalla, forced the international investors to start looking closely at the Indian equity markets. "That renewed interest will now be lost," he rues.

On paper, at least, everyone is aware of the fall-out of putting the reforms process on hold. All's as well with the economy as can be, and the absence of any crisis (apart from political ones) means there is little motivation for the NDA to unleash its reformist face. "The next wave of reforms will only happen when it is proved that not reforming would be far more disastrous than reforming," says Crisil's Gokarn. That'll probably be the middle of 2004, but this is one of those occasions when this magazine would dearly love the government to prove it wrong.