Millennium Post

Monsoon and political pinpricks

Weeks after taking over the finance portfolio himself as an interim arrangement, and later, even after giving it to P Chidambaram, Prime Minister Manmohan Singh faces daunting challenges in implementing even what is essential and deserves greater priority, as a matter of urgency, to revive the economy’s growth impulses. He has been moving in some directions but must avoid the pitfall of actions ‘too little and too late’ if his government has to command a measure of credibility in a politically treacherous environment.

The failure of monsoon over large parts of the country – mainly in the west, north and parts of peninsular India – in its first eight weeks, has raised alarm signals for many of kharif crops, and the prime minister has directed that contingency plans be set in motion to help farmer, with seeds and deal with power and water shortages in coordination with the affected states.

Despite the Indian Meteorological Department revising its weather forecasts at intervals, the hope remains that the country will escape a drought, unlike 2009, if rainfall deficiency is made up to a large extent during the next eight weeks. The below normal monsoon in a year with abundant food stocks does not pose problems on the food front at present but could give a push to inflationary expectations while relief expenditure will add to the burgeoning fiscal deficit.

Now that the presidential elections have been completed with a sweep by the erstwhile finance minister and political veteran Pranab Mukherjee, who became the 13th president of the Republic on 25 July, the United Progressive Alliance-II can address itself seriously to the economic and legislative tasks ahead, in the  weeks to come.

It is time, therefore, that the prime minister with senior Cabinet colleagues confers with leaders of all opposition parties and place before them the inescapable tasks that have to be gone through, in a spirit of urgency, to stimulate investments, domestic and foreign, and restore the growth momentum as well as to put the nation’s finances on a sound footing.

There has to be some measure of understanding on the part of all concerned that India is going through a difficult period, partly aggravated by global uncertainties, and that growth with price and financial stability can only be achieved through a process of fiscal discipline and feasible reforms for sustained growth. It should be possible to arrive at a consensus on at least some of the essential policy measures that will generate a sense of confidence for investors at home and abroad and also help to regain the elan that democratic India has enjoyed in recent years for economic vibrancy.

There has been a burst of activity in the prime minister’s office (PMO), taking issues one by one, and setting in motion processes for achieving ends. This is as it should be but the earlier we could come up with measures in relatively higher priority areas the better it would be both for the economy as such – unleashing ‘animal spirits’ as the saying goes – and for our international standing. The prime minister has set up an expert group to go into GARR (General Anti-Avoidance Rules), set to come into force from April 2013, and finalise guidelines, after consultations with all interests by 30 September 2012. This group headed by international tax expert Parthasarathi Shome might also throw light on limits of retrospective application in tax policies.

The PMO has moved over the last two months on the coal imbroglio and the woes of the power sector, but the long-neglected problems do not provide for quick fixes. Power shortage is the biggest infrastructural constraint which is affecting output and growth and adding to human misery. Unless these two sectors ensure greater efficiency in the supply of coal and operation of the utilities, the country will continue to be plagued by shortages and its disastrous allround impact.

The PMO has also set up mechanisms both for monitoring the implementation of high-value projects so that these do not run further into cost and time over-runs as well as for expediting clearances for projects in the oil and gas sectors. A Project Clearance Board under the cabinet secretary and with concerned ministries will speed up clearances, regulatory and security-related, for infrastructure and energy projects. This is needed for oil and gas exploration blocks already awarded but held up for clearances.

The macro-economic environment at present poses a series of problems including persistently high inflation, fiscal and current deficits, industrial slowdown, and sharp rupee depreciation. Contrary to government’s pious wishes, the headline inflation has not come down within the comfort zone for the Reserve Bank of India to continue easing monetary policy, after its big bang 50 basis points cut in April last. RBI has been awaiting action on the fiscal front as inflation is fuelled by government expenditure and massive borrowings. The prime minister has emphasised repeatedly that fiscal deficit reduction must have the highest priority but this would hinge on a significant cut in oil subsidies, especially diesel, LPG and kerosene.  Although diesel has been de-regulated in principle, government has so far hesitated to raise the price of diesel while the oil companies have been allowed periodically to revise price of petrol.

In fixing the fiscal deficit at 5.1 per cent of GDP for fiscal 2013, the finance minister had assumed oil and other subsidy reduction at around two per cent of GDP. The ministry of petroleum and natural gas has worked out a formula for partial decontrol on diesel and LPG prices which, it feels, will lessen the impact on the consumer and the economy. Undoubtedly diesel price rise would have a cascading effect and will give, along with the monsoon playing truant, an added push to inflation. This is another contingency which will hold back RBI from coming up with even a 25 basis point cut in its first quarter review on 31 July, even as it awaits major action on the fiscal side. The chief economic adviser, given to predictions, expects inflation to soften in October so that it can open up prospects of growth revival with the  resumption of rate cuts, in the latter half of the year.

The Cabinet has approved disinvestment proposals including about 11 per cent in SAIL but all such proposals await conducive market conditions to raise part of the disinvestment proceeds budgeted at Rs 30,000 crores in the current year.  Meanwhile, pressures on the union budget are building up. The first quarter revenue receipts have fallen short of the targets because of slowdown in the economy. In exploring ways of beefing up public finances, government has enjoined state undertakings with cash surpluses to invest in expansion and acquisitions which it is hoped would propel the economy and help to improve fiscal position. Given all these tough problems the government has to navigate through, a dialogue with the political parties becomes essential for wider support for austerity measures or reforms such as those pending with the financial sector legislation before the Lok Sabha on which the Standing Committee has given its recommendations.  But UPA-II, it seems, is hell-bent on pushing FDI in multi-brand retail as the instant solution for all the ills of the economy.

Apart from TMC leader Mamata Banerjee and opposition-ruled states, the Samajwadi leader, Mulayam Singh Yadav, and Left leaders have jointly written to the prime minister against proceeding with opening up of the retail sector to MNCs like Walmart, which would displace thousands of small retail shops and led to large-scale joblessness. In any case, this controversial reform should not be allowed to come in the way of more urgent and badly needed policy initiatives and effective implementation.
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