By Ramesh Kanitkar
The business confidence is turning for the better as the industry and the market expect Singh, the father of Indian economic reform, to quickly unleash a process of change that will revive the economy from its lowest growth rate in the past decade, and will also make it conducive for foreign investors to invest in India. The indicators of mood change: In the last three trading sessions, the BSE sensex has gone up by 523 points and the rupee has seen its biggest daily gain in three years on Friday. There is high-decibel activity everywhere as Singh wants the “animal spirit” in the economy to be ignited. He started with a decision on cutting petrol prices to clarification on GAAR (General Anti-Avoidance Regulation), a controversial tax issue that led to an uproar on Dalal Street since the former finance minister Pranab Mukherjee presented his budget.
Also, the possibility that participatory notes (P-Notes) may not be included in the taxation, has perked up the sentiment. Such instruments are issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the Indian stock market without registering themselves with Sebi.
There are also talks to make the mutual fund industry more attractive, which in recent times had begun losing sheen. Undoubtedly, Singh has started on a right note by asking his advisors and bureaucrats in the finance ministry to look for ways to reverse the climate of pessimism and to shun fiscal profligacy, the two monstrous problems threatening the economy with dire consequences. But, there are far too many problems in the economy that need to be addressed to reverse the climate of pessimism and get investments flowing and growth rate back in the 8-9 per cent trajectory.
India’s Balance of Payments (BoP) problem is one of the issues to be dealt with as the country has wide current account deficit. India’s BoP deficit was $5.7 billion in the first quarter (April-June) of 2012, compared to a surplus of $2 billion in the same quarter of 2011. To finance this, India needs large foreign capital. It also needs large government savings to finance the BoP crisis. In the past many years, the government’s investments have been many times more than its savings. Large-scale subsidies on food, fuel and fertilisers have eaten its resources. Thus there is an urgent need to shun some of the unwarranted subsidies, analysts say, which will also help reduce the whopping fiscal deficit.
But the question is, will Singh be able to change the state of affairs? Let’s accept the fact that if the former FM was forced to push reforms to the backburner, it was mainly because the decisions were always guided by the needs and demands of the coalition politics of the UPA government.
Some of the path-breaking decisions like foreign direct investment (FDI) in multi-brand retail, hike in rail fare, pension reform, raising FDI limit in life insurance were also reversed or kept in the cold storage due to opposition from the government’s own allies. None of this has changed, not apparently.
Will Singh be able to take hard decisions with his own adamant allies like Trinamool Congress opposing all pro-reform decisions? Though the political analysts are hoping that a tie-up with Samajwadi Party will bring in the much-needed support, the government is not very sure if it is wise to seek it.
There is an all-round attack on the economy. While the Reserve Bank of India has repeatedly been warning against rising inflation and rising fiscal deficit choking India’s economic growth rate, the government’s own policymakers are attacking the regime for going slow on fuel price reforms and subsidy reduction. The overseas rating agencies have also threatened to downgrade India’s sovereign rating as reform has taken a backseat.
Though the stock markets have greeted Singh as FM with a major bull rally at the fag-end of last week, the D-Street feels that mere talks will not be good enough or sufficient for a turnaround in the investment sentiment.
Investors and economists blamed weak leadership and muddled policies for failure to curb government spending, increase fiscal deficit and thereby, alienated many foreign investors. Though issues raised by the PM are serious, there has to be clarity on certain tax proposals, they say.
So, the challenges for Singh are to take more substantive measures to spur economic growth. Leading rating agency CRISIL’s Chief Economist D. K. Joshi says that the mining sector’s issues need to be sorted out, without which industrial growth has taken a beating. Improving the prospect of investing in manufacturing, mining, logistics and agriculture is the need of the hour. If this is achieved, stock market revival is bound to happen.
Since domestic bourses are dominated by FIIs, they will return with cash if the investment conditions are made conducive to them. Basically, the country needs to shore up its credibility among investors, both in terms of sticking to its projected fiscal deficit and also narrow down its current account deficit.
Also, regulators should not only punish the guilty in capital market frauds, but also make sure that an investor who is the ultimate victim of the fraud is able to recover part or whole of the losses suffered.
Since the stock markets have been generally doing badly in the last 12 months or so, the initial public offerings (IPOs) by companies have virtually dried up, chocking a major source of fund for investment.
With expectations rising high, it is clear that Singh’s job as finance minister will be much more challenging than him as the prime minister. It is an alarming fact that for a developing economy like India, de-growth in capital formation spells doom.
Many of the important projects are in limbo and the government needs to announce some time-bound deadlines for their completion. One such project is the dedicated freight corridor. Infrastructure development is high priority in the 12th Plan period, with the country envisaging an investment of $1 trillion towards it in the coming five years.
Analysts say urgent steps are needed to fix the awfully inadequate infrastructure to woo investors, who are waiting in wings to explore India’s vast middle class market.
Singh, who has been widely regarded as a silent performer, has started on a positive note. After his first step to fix GAAR rules to woo foreign investors, experts have started seeing him as a man who understands the pulse of the nation. The prime minister knows the root of all problems and hence, the decision to simplify tax rules. It remains to be seen whether he is allowed to move on with the same vigour in solving all other economic problems confronting the country.INAV