Beyond storms of september
After a traumatic August with Anna Hazare and Baba Ramdev fasts and with them delivering ultimatums to the Congress-led United Progressive Alliance [UPA] government, and the Comptroller and Auditor General’s new swipe on the latter’s allocation of coal blocks at a loss the federal auditor puts at Rs 1,86,000 crores, the Manmohan Singh government, unflappable as ever, looks to September hopefully to give a new sense of direction for the beleaguered economy. It has meanwhile to steer through stormy scenes in Parliament for the rest of the session till the first week of September.
The government’s rebuttal of policy indiscretions pointedly cited by CAG, however plausible, will not make any difference to the Bharatiya Janata Party-led opposition onslaughts in Parliament and outside, adding more fuel to their fire against the Congress in the run-up to the national election in 2014. BJP has already called for the resignation of the prime minister whom, it contends, had held the charge of coal ministry in 2006-2009 and dithering and delays at that end had caused private gains at cost to the exchequer.
Lack of a clear cut policy in regard to allocation of land, mineral and other natural resources for industrial and infrastructural developments involving private sector has hobbled the UPA government throughout, leading to the 2G spectrum scam where the telecom licenses awarded indiscreetly were cancelled by the Supreme Court, with firm direction to government to take the auction process in all such cases.
Having allowed chronic delays and blaming ‘coalition compulsions’ for its ad hoc responses to evolving situations, the UPA-II has now sought a clarification from the apex court whether it should go only by auction for all resources, besides spectrum licences. Competitive bidding was also not opted for in coal block allocations. The government contends that the allocation was to ‘induce rapid development of infrastructure [power] essential to keep the economy on high growth trajectory, by involving the private sector in capacity creation in identified priority sectors’.
The central government, it maintains, did not reckon it as a ‘revenue generating exercise’ and in allocating, it had to keep in view the need to create larger capacities in power, critical for the national economy, as well as other clearances the private sector required over time. Also, there were conflicting legal opinions on bidding procedures while some states were reluctant to assign coal blocks through auctions, government said.
In his Independence Day speech on 15 August, Prime Minister Manmohan Singh, for the first time linked development issues to national security and attributed ‘policy paralysis’ to a lack of political consensus on ‘many issues’. Bringing inflation to the forefront – now acknowledged as one of the factors – along with lack of consensus, in the way of rapid economic growth, Manmohan Singh said Government must ‘also control inflation’.
A relatively weaker monsoon this year has added to the difficulties on the fiscal front, with additional expenditure for drought-hit areas and could aggravate inflationary pressures. While Wholesale Price Index [WPI] was below seven per cent [6.87 per cent] in July, and subject to revision, primary and food articles, in particular, were all in double digits. The core inflation [manufactures] stood slightly lower at 5.58 per cent than in June but RBI does not yet consider it to be within the comfort zone. Overall, the industrial output virtually stagnated in April-June quarter.
Nevertheless, strong signals have been given by the prime minister and finance minister Chidambaram on what government proposes to do in the coming weeks to restore business and investor confidence and create a conducive environment. Chidambaram has listed fiscal correction [a group of experts at work], tax clarity to allay misapprehensions of foreign investors on GAAR and retrospective application of tax laws [being gone into by the Parthasarathy Shome Committee of Experts], and attracting investments in mutual funds and insurance policies to raise the rate of savings. The finance minister aims at hitting an investment target of 38 per cent of GDP in the near future and has said he would seek a reduction of ‘high’ interest rates, speed up regulatory reforms, ensure tracking of investments and ‘fine-tune’ policies to facilitate capital flows to India. Actions on removal of supply side constraints to control inflation and taking up of pending financial sector bills in Parliament have also been indicated.
Amid turmoils in Parliament, the government may face headwinds in negotiating a political consensus on key legislation. This is apart from overcoming the resistance of its major ally, Trinamool Congress [TMC] to FDI and subsidy-related measures, in particular. Meanwhile, high-level efforts are on to bring round the TMC chief minister of West Bengal Mamata Banerjee to take a positive view on at least some of the urgent issues.
Government now realises that it has to move with some speed in initiating some of the announced reforms, especially at a time when India’s outlook is downgraded by global rating agencies and risk aversion on the part of foreign investors is still high. At the same time, UPA-II wants to ensure that it carries its allies with it, as far as possible. Increasing the pace of economic growth with steps to revive domestic investment and improving the management of government finances are priority tasks for government. The prime minister hopes the economy will grow slightly better than the 6.5 per cent in 2011-12. The Economic Advisory Council headed by C Rangarajan estimates GDP will rise by 6.7 per cent [with agriculture growth at 0.5 per cent, due to weak monsoon and reduced reservoir storages, manufacturing 4.4 per cent, industry as a whole 5.3 per cent, and services 8.9 per cent].
The finance minister said that faced with challenges – global economy, twin deficits, inflation and industrial slowdown – ‘moderate growth’ as in the previous year should not ‘dent our confidence’. Government had overcome similar challenges in the past, he said and has welcomed the measures announced by SEBI which are calculated to stimulate financial savings among households as well as give a fillip to the mutual fund industry.
The finance ministry will announce decisions shortly to attract more people to invest in mutual funds, insurance policies and other well-designed instruments, all these with a view to encourage financial savings rather than investing in gold, Chidambaram said. He favours taking calibrated risks with interest rates in order to stimulate investment and lessen the burden on consumers.
The Reserve Bank awaits government moves over the next two to three weeks both on the fiscal side and supply side measures to take a balanced view of prospects for growth and inflation during the latter half of the year. It will determine the policy stance in the light of August WPI and Consumer Price Index data in its mid-quarter review on 16 September. A road map for fiscal consolidation is expected to help avert a sovereign rating downgrade, apart from enabling the RBI to re-focus monetary policy now tilted more towards containing high inflation. [IPA]