Reinforce confidence

IN THE ONGOING crisis over the Unit Trust of India, both the Government and the Trust have won a reprieve. Last Thursday, an Opposition-sponsored motion censuring the Government for mishandling the UTI affair was defeated. The Joint Parliamentary Committee already probing the post-budget stock market shenanigans will now extend its reach and examine the UTI affair in its entirety. That should give the Government and the UTI another opportunity and some more time to fashion a revival strategy for the troubled institution. As for the UTI, the specific gain is that there have been no large redemption requests by the unit holders during the first three days of the start of the new repurchase scheme.

Important as those developments are, they cannot be viewed as anything more than short-term gains, a breather maybe, for attempting the far more difficult tasks on hand. The UTI must demonstrate that it has regained investors' confidence in a far more comprehensive fashion than now before it embarks on the tough and painful process of restructuring. That task will no doubt be facilitated if there is a broad political agreement on how the public financial institutions ought to be handled both in normal as well as in exceptional times such as the those faced by the UTI. Granting autonomy to all government-owned institutions is a desirable goal. Though aired from time to time it has been very difficult to be put into practice. As one particularly unseemly facet of the UTI episode shows, allegations of top level interference in normal decision-making will never go away. Experience in other countries has shown that key institutions can be made to retain their autonomy. However, in India this calls for a radical change in the way the Government interacts with the institutions it owns. It can be achieved only through consensus- building among political parties. The JPC can give a path- breaking blue print for what official policy should be on core economic governance issues.

The acerbic nature of the parliamentary debate over the UTI shows how difficult such a task will be. The Finance Minister tried to fend off Opposition criticism by pointing fingers at a few controversial UTI investment decisions during the Congress era. The Government and the Opposition can do much better than apportion blame at this stage. The time has come to reinvent a more coherent strategy to safeguard the institutions and protect their investors and other stake holders. Clearly the initial inept handling of the UTI crisis has magnified the problem, but even now there could be valuable lessons for the political leadership to contain future crises. What is particularly worrying is that the loss of confidence in India's premier investment institution is threatening to engulf development financial institutions such as the IFCI too. And public sector banks, saddled with large non-performing assets, might well become the next target. That would be catastrophic for the country.

The Finance Minister has done well to explain that the UTI's problems have not occurred overnight. The US 64 Scheme is particularly flawed in that it has traditionally paid high returns while deploying its large corpus disproportionately in equities. The technology stocks were in every fund manager's purchase list last year. All the funds had bet wrongly and even the few widely touted private sector balanced funds have lost more than the UTI. Yet, because of its opaque structure, the Trust has been faulted more. However, recent inter-fund comparisons demolish the myth of the superiority of the private sector. Rather than search for inane solutions to the UTI imbroglio - such as handing it over to the private sector - the Government should by word and deed reinforce the confidence in the financial sector, where it is still the dominant player.

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Section  : Opinion
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