Onerous burden lies ahead

Once the final tally is counted and the formation of the new government gets under way in the ensuing couple of days, the inescapable priority duly exercising the concerns of the next government must be the choice of the man or woman who will don the mantle of the finance portfolio. The next finance minister has the onerous task to steer the economy and lift it from the swamp of slowdown it had sunk into. That the UPA government in its two tenures of close to a decade with two experienced finance ministers Messer Chidambaram and Pranab Mukherjee had messed up the management of the economy was nothing unknown to anyone as the Aam Aadmi in whose name the UPA coalition governed the country had to bear the brunt of relentless rise in prices of even essential items.

But what could not escape notice in making a fair analysis of the tenure of the otherwise politically correct finance ministers of the UPA was their negligence in not paying due heed to headwinds and whirlwinds as they adamantly went about augmenting consumption expenditures of questionable nature without ensuring the wherewithal to finance them or paying due heed to harnessing growth impulses on which alone such a sop-laden economy could be sustained and sustainable!  Indian economy could not be assumed to grow by consumption expenditure and the resultant income into the hands of millions of spenders when investment famine and lack of even working capital at affordable cost to productive segments of the real sectors of the economy forbade the latter from nourishing growth impulses to build the sinews and strengths of the economy in the medium to long-term.

The first bi-monthly monetary policy statement 2014-2015 by the central bank Governor Raghuram G Rajan released in April aptly bemoaned that lead indicators do not portend any sustained revival in industry and services as yet. The outlook for the primary agricultural sector is also contingent upon the timely arrival and spread of the monsoon. Besides the unseasonal rains in early March 2014 in various parts of the country that would likely to adversely hit rabi crops like wheat, mustard seeds, onions and jowar, the possible effects of El Nino on the monsoon as forecast by the Indian Meteorological Department (IMD) recently infuse an additionality to uncertainty about future harvests. 

With the passage of the National Food Security Act by the UPA government, the successor government must marshal all its mettle to meet enhanced food demand in this regard in the face of tightening farm labour markets and escalating input costs. How far the next finance minister will go the extra mile to ensure enhanced food production does not suffer any jittery jerk in the event of a deficient monsoon through a mix of policy support including targeted extension services to farmers and meeting their credit requirements through formal banking channels is too early to determine when the composition of the new government is nebulous as of now. But the biting reality is that in a country where food inflation can wreak untold miseries on millions, the finance minister can ill-afford to ignore this aspect of the staring problem of the farm sector and try to mitigate them. 

With the narrowing of the twin deficits – both current account and fiscal – as well as the replenishment of foreign exchange reserves, adjustment of the rupee exchange rate and setting in motion disinflationary impulses as enumerated by the RBI, the risks of near-term macro instability have no doubt dwindled. But given the glacial fact that annual average consumer price index (CPI) inflation has touched double digits or stayed just below for the last six years, this has left a range of problems to the new government. Besides exerting a debilitating effect on macro-financial stability through several channels, unrelenting CPI has embedded inflation expectations and led to financial disintermediation, lower financial and overall savings, a wider current account gap and a weaker currency.  For the next finance minister, the challenge on hand which he must perforce address is how to revive growth impulses in a non-inflationary way. This is particularly so when growth concerns remain significant with GDP growth staying sub-5 per cent for seven successive quarters and index of industrial production (IIP) growth stagnating for two consecutive years.

But amid the slowing economy, no government can afford to adapt austerity as it would exacerbate the pains of people without bringing them any respite from the exorbitant cost of existence in a high-cost economy. Given the limited leeway for finding resources to promote public expenditure on desirable developmental projects to kick-start the economy, the next finance minister must do out-of-box thinking. Instead of using coalition compulsions as a flimsy and lazy excuse to bite the bullet or postpone addressing issues that cry for action, the next finance minister can plump for alternative strategies to devolve more funds to the State governments.  This will be in place of the current practice of spending by the Centre on a raft of centrally-sponsored schemes or the flagship programmes of the Central government as if they are too holy to be hollowed out. 

In fact, fiscal federalism as enjoined upon by the successive Finance Commissions meant that the Centre ought to devolve funds and functionaries and not just be content with foisting its own pet programmes on unwilling States. This would surely go a long way in convincing the disparate States to come on board to back and bolster Centre’s forward-looking fiscal legislations such as the Goods and Services Tax (GST) and the Direct Tax Code (DTC), the need for adherence to fiscal discipline as against giving pause in its implementation and opening up some other productive sectors to greater competition and foreign direct investment (FDI). But this requires abnegation of power by the Centre in some crucial areas of operations so that the States do not mind being a party to bipartisan promotion of the much-needed economic and trade policy reforms that remain stalled in Parliament for far too long to evoke the credibility of investors, both domestic and overseas.

As corporate investment is indispensable to give a due impetus to the growth story of the country,  the heavy debt overhang of corporate  and the over-exposure of the banking system to some high capital-intensive areas like telecom, civil aviation, power and infrastructure areas  and other  sunrise industries need to be cleaned up. This requires beefing up the capital adequacy norms of the public sector banks through due capital infusion. While doing so, the next finance minister must underline the need for the banking system to pricing risks realistically to genuine entrepreneurial activities across the real sectors of the economy. 

The new finance minister must have his feet firmly planted on the ground in dealing with this important issue so that the private sector is not unduly discouraged from leveraging and is properly equipped to take risks by unleashing the animal spirit in productive segments of the economy. In the aftermath of the euphoric victory, the ruling party should not lose sight of the harsh ground realities of the structural problems plaguing the economy. The finance minister of the day for the next government has his tasks cut out primarily to restore confidence of the investing community that it is safe doing business here as the policy framework it is going to lay bare would be able, stable and investor-friendly and together transparent too with little discretionary powers either to politicians or to the bureaucrats to wrest any rent for themselves! IPA