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Millennium Post

Economy pays for past sins

The Finance Minister P Chidambaram’s overdrive since the beginning of August, with policy refinements for improving the savings-investment climate and arresting the growth decline, had not set the stage for revival of corporate investments till end-November. Nevertheless, he remains hopeful that, with much more to be done by the government itself, things would start turning around in the last four months (December-March) of fiscal 2013.

Now, the worry is not so much about the current year, which is unlikely to see growth recovery above 5 to 5.5 per cent, but the medium-term prospects for the economy. The slew of reforms proposed in mid-September, including the most controversial FDI in multi-brand retail, on which the UPA-II government is needlessly focused even at the risk of an adverse vote in Parliament, did help to turn the overall business environment positive. But the morass into which the economy has been driven rules out the prospect of any early robust revival of the economy.

UPA-II may have also been perceived globally to have overcome its prolonged ‘policy paralysis, but its credibility to accomplish what all it has promised is still very much in doubt, even more at home, given its dependence syndrome for political survival, and the serious unresolved infrastructural hurdles for investments. These would not have arisen in the first place, if only the UPA-II had not taken things for granted in economic management.

India, still counted as a global growth-driver  is, however, rated poorly in regard to fiscal imbalance and it remains an ‘outlier’ in inflation for the fourth year not among emerging markets only but also other developing economies. There are no areas of comfort on which to base expectations of a strong rebound in the near future, given the significant growth slowdown, persistent inflation, stagnation in manufacturing, excessive twin deficits, sharp rupee depreciation, inadequate capital flows and erosion in the level of reserves.

It is the fiscal over-runs, leading to high inflation and in turn monetary tightening, that have contributed, among other factors, to economic slowdown. There are no expectations of any moderation in the current level of prices, no matter the marginal declines in the WPI or CPI indices on year-to-year basis. In current fiscal so far, the rate of inflation is higher than it was in the relevant months last year. The other major factor is the infrastructure-related problems (power, coal, roads etc), which have stymied growth.

Until recently, UPA-II was not getting its act together despite the emerging economic shocks which were conveniently blamed on global slowdown. It had made a triumphal re-entry to power in May 2009 but all the promises apart, the goals it had set for the first 100 days remained on paper, a typical example of which was addition of 20 kms of new roads a day.  This modest target proved elusive for the first three years of UPA-II. There is no knowing where we stand today in relation to the ambitious National Highway Programme and the Golden Triangles, which UPA took over from the BJP-led NDA in 2004.

The most disappointing has been the government’s management of the coal-power sector with approved projects, including mega thermal projects, awaiting clearances interminably keeping large parts of the country dark and impacting on output in several sectors. On every front, problems had been allowed to linger without solutions in sight.  A burst of corruption scandals in the last year and a half also led to laissez-faire taking hold of decision-makers.

It is understandable that UPA-II government should conveniently overlook the extent of damage the economy had suffered from its own policy inaction and macro-economic mismanagement and source all our ills outright to the ‘global slowdown’, a contention which has no takers in the country including among its charmed circle, the corporates.

The Prime Minister Manmohan Singh delivered some home truths when he addressed a gathering of several hundred CEOs in Mumbai on 10 November. He said, as never before, that the economic slowdown in India is “partly because of the global downturn, but it is partly also because of domestic constraints which have arisen.” He said growth might be only around 6 per cent in the current year.

‘We have to do the right things at home to accelerate our own growth,’ he said. Here is some acknowledgement of things having gone wrong, especially with infrastructure projects, delayed by various clearances. He said that Government was looking at ways to speed up clearance processes and make them more transparent. (But the decision on proposed National Investment Board to accelerate project clearances, mooted more than four weeks back, is yet to be taken).

The Finance Minister was dismayed that the RBI did not cut the repo rate in its Second Quarter Policy Review on 30 October, as urged by him.

The Prime Minister did not seem to take as negative a view of what RBI had done as FM, when he said that monetary policy had an important role in keeping inflation under control while also supporting growth and that central banks had to balance both compulsions. Significantly, he added, as a policy imperative, lower inflation “is good both for growth and for making growth more socially inclusive”.

With a belated realisation of the gravity of the economic situation, the government began to display some ‘courage and risk-taking’ with a reform agenda and launched procedural initiatives. But there are still major unfinished steps, both legislative and executive, to be taken before the country can get back to its potential growth path.  

The outlook for the next fiscal year is also not rosy, being a pre-election year when the budget would be dominated by voter concerns. [IPA]
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