Millennium Post

UPA’s uphill task to lift economy

Barring one variable – fiscal deficit control – Finance Minister Chidambaram’s much-touted reforms and pep talks to ginger up the economy, which had hit its lowest point in a decade, have failed to get either the home investors on the move or to attract the badly-needed capital flows to finance peaking external deficits.

International assessments of India’s economy and of political uncertainties for a minority government in a pre-election year are far from gratifying. There are serious questions about India’s ability to raise its growth rate from the five per cent in fiscal 2013 to the targeted 6.5 per cent in 2013-2014, with all the unresolved structural bottlenecks for infrastructure. Growth is ‘weakening’ in India, says OECD while Asian Development Bank (ADB) says India may grow six per cent in this fiscal.

While the finance minister has claimed success in containing fiscal deficit to 5.2 per cent of GDP in 2012-2013, there are doubts whether, given all the pessimism about his growth and revenue projections, the fiscal deficit target of 4.8 per cent of GDP could be achievable in the new fiscal year.  It would certainly require a normal monsoon and ‘more reforms’ he has been promising day in and day out, and above all, effective governance in the country.

The ADB in its Development Outlook 2013 says India’s growth ‘may edge upto six per cent’ in fiscal 2014, but this is subject to risks of a bad monsoon, further subsidy cuts for fiscal consolidation and revival of investment and continued sluggishness in global economy. Ending delays in environmental clearances, obtaining parliamentary approval of the complex land acquisition bill, and improving infrastructure for fuel deliveries to power plants to end electricity shortages are other listed pre-requisites.

For months, Chidambaram has simply been trying to talk up the economy attributing all our ills to global slowdown and partly to ‘high interest rates’ and fiscal weaknesses for which he no doubt laid out a road map. His focus was mainly on controlling fiscal deficits which he did for fiscal 2013 by severe cuts in spending and holding out threats to tax assesses to garner more revenues.

Secondly, he recognised that the rising current account deficits posed a greater challenge and in his scheme of things, foreign investment is the only way to finance such deficits, no matter the growing dependence on external inflows, including short-term borrowings.

The finance minister’s relentless quest for foreign investment has had no pay-offs yet. He has travelled over Asia and Europe and is now headed for North America, coinciding with the Spring Meetings of IMF/World Bank. He looks to Canada with great hopes, as he did in Japan, in his hunt for foreign investments for infrastructure and for easing the external payments situation. He has also been nudging the RBI to keep lowering interest rates, shifting its pre-occupation with containing inflation which Chidamabaram keeps insisting is on decline ignoring the food inflation – a line which finds no takers here or abroad.

But Chidambaram believes that RBI needs to do much more amid expectations of more accommodation in the RBI’s Annual Policy Statement for fiscal 2014 on 3 May. For his part, RBI Governor Subbarao has been maintaining that as long as the fiscal deficit remains high, banks may be reluctant to reduce the lending rates, even if the central bank were to cut the policy rates. ‘Fiscal deficit is a problem, because it exacerbates inflation and impedes monetary policy transmission’ he said.

On monetary policy, ADB shares RBI’s view that easing the policy would depend on both progress on bringing down inflation while the extent of easing would be conditioned on progress in reducing the current account and budget deficits. For 2014-2015, ADB has projected growth at 6.5 per cent but for this, the economy needs to pursue structural reforms to create a more favorable investment environment and spur growth, the ADB said. China is expected to accelerate to 8.2 per cent from 7.8 per cent last year, driven by strong consumption and investment.

Belatedly, UPA government realised the extent of setbacks to the economy from environmental and other procedural delays and problems of linking fuel resources for power generation plants. Over the last three years, a sense of complacency had come in the way of tackling policy and structural weaknesses until growth began taking a nose-dive.

According to latest finance ministry data, external debt had risen by $31 billion in the first nine months (April-December) of 2012-2013. Analysts point out that deepening dependence on debt and portfolio flows would make the economy vulnerable to risks of changes in sovereign ratings, especially in the context of weak global recovery due to fiscal deadlock in US and financial shocks in eurozone.

There is also a view that it would be better for India to avail of IMF’s Flexible Credit Line for major economies going through temporary problems on external account rather than go round shopping for investments which are not easily forthcoming. But electoral politics would rule it out at present.

Global rating agencies are once again at the doors of the finance ministry for consultations on the state of economy, with continuing inflation, falling rupee, decline in exports and widening current account deficit – areas which they had critically viewed in recent months.

Nevertheless, there is a sense of urgency in the finance ministry to establish that macroeconomic fundamentals are sound as the agencies would shortly review their ratings for the economy. It would also seek to persuade the agencies of ‘realism’ behind the budget estimates and of reforms accomplished and those on anvil. (IPA)
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