Chidambaram has few easy options to revive the economy
By S. Sethuraman
India is currently passing through one of those extraordinarily difficult periods, seemingly worse than ever before, given the macro-economic instability, aggravated by the highly uncertain global environment as well as an array of political challenges that the Congress-led UPA-II has been encountering in re-establishing credible governance. Would it be nemesis in 2014, hardly twenty months away?
As if to reinforce the charge of weak governance and policy paralysis held against the UPA Government, in the wake of corruption scandals that erupted since 2011, most of India went through two days of massive breakdowns of power transmission system, which paralysed transportation and other essential services.
Lack of accountability is writ all over and showed itself poignantly in the Tamil Nadu Express fire which killed or maimed scores of passengers on July 30, one of the frequently occurring disasters on the railways run without committed leadership at the top, a vital artery of the nation, remotely controlled by TMC leader Ms. Mamata Banerjee from Calcutta, as an “ally” of the ruling coalition.
It is the wayward allies like TMC that has contributed significantly to UPA-II’s failures on reform front, to a large extent, though responsibility for weak governance overall, resulting from paralysis in decision-making, especially in the crucial sectors of infrastructure, must also be laid at the door of Congress Party in the Government.
Momentarily, the gloom surrounding the Government lifted with the massive backing in the country for former Finance Minister Mr Pranab Mukherjee to raise his stature as the new President of the Indian Union. Voting for Mr Mukherjee cut across political parties, but this was an exception and the opposition parties have thereafter returned to their inimical approach on a whole range of issues before the UPA-II.
The Prime Minister Dr Manmohan Singh, whose personal reputation for intellect and integrity, has helped to steer UPA through recurring shocks to the system, has lately embarked on a series of administrative and policy measures to resurrect a coherent image for his government with a determination and confidence to face the electorate in 2014.
These included an expert committee for a re-look at the tax changes affecting foreign investors in the Budget for 2012-13 presented by the former Finance Minister in March and later voted by Parliament with some amendments. The Prime Minister also set up mechanisms for project financing and project implementation and cleared policy on transfer of government-owned lands so that infrastructure projects, particularly PPP projects, are not held up because of procedural delays. This would speed up the award of PPP projects from this month onwards significantly, it is officially stated.
The Prime Minister, who had temporarily held the finance portfolio, is yet to effect the long-delayed reconstitution of his Cabinet to become an effective vehicle of credible governance. It would probably take place later in the year, after the monsoon session of Parliament beginning August 8. Meanwhile, he has reshuffled two major portfolios, bringing back Mr P Chidambaram to Finance, where he excelled during his five-year stewardship of this key economic ministry in UPA-I, and shifting Mr Sushil Kumar Shinde from Power (on the day of the blackout) to succeed the former in the Home Ministry. Mr Veerappa Moily, Minister for Company Affairs, now entrusted with Power in addition, has already initiated moves to tone up the national grid system and would meet Chief Ministers of affected states soon to sort out issues and prevent such grid collapses for the future. Mr Moily has said he would seek the cooperation of state governments not only in maintaining grid discipline but also in controlling transmission and distribution losses and improving the finances of distribution companies. An expert committee is already at work on technical issues raised by the two-day blackout.
There are high expectations of Mr Chidambaram, given his financial expertise and ability to provide a clear sense of direction, bringing about a turnaround in the economy to reverse the slowdown, tightening control over expenditure with essential fuel subsidy reduction, and improving the investment climate for domestic and foreign investors along with an acceleration in the processes leading to new tax laws (Direct Tax Code and GST) being implemented from April next and securing passage of bills relating to banking sector reforms. Fast-growing India’s economy had run into a major lowdown, more like stagflation, with growth hovering around 6 per cent and inflation edging toward 8 per cent. The economy is also hit by twin deficits, fiscal and current, which call for bold measures to bring down imbalances on both the domestic and external fronts. India is no longer enjoying an “embarrassing comfort of surplus” in foreign exchange reserves, as Mr Chidambaram had noted at one time, but is under severe pressure to access the needed capital flows to balance its widening current deficits at a time global uncertainties have intensified with the worsening of the euro debt crisis and a tepid recovery and a threat of “fiscal cliff” in the world’s large economy, USA.
The Reserve Bank had on July 31 once again called for fiscal measures which would facilitate the monetary policy to become more effective in controlling persistent inflation and respond to the need for growth of the economy. In its July 31 macro-economic survey, RBI expressed its misgivings over the fiscal deficit which, it said, was likely to breach the budget target of 5.1 per cent of GDP, with revenue growth lagging behind budget assumptions. Additionally, the country is now in the grip of a drought over large parts and the Centre has already announced a relief package of rs.1900 crores to states facing scanty rainfall plus offering a 50 per cent diesel subsidy to farmers. Overall Mr Chidambaram faces a highly challenging scenario and there are no short-cuts to revive growth, in a situation of price surge, with some capital (investment) spending, and all that he is likely to do in the near future would be to unveil his strategy for correcting macro-imbalances over a period such as would restore investor confidence in India and abroad.
Mr Chidambaram has taken over almost midway in the fiscal year and will be constrained in re-writing the budget significantly or making substantial new fiscal commitments when he is all for fiscal consolidation where he had succeeded in the years 2004-08. His last budget for fiscal 2009, a year before the 2009 Lok Sabha elections, had giveaways with the farmers’ debt waiver and a generous implementation of the sixth pay recommendations. The global financial crisis thereafter further damaged budgets and economies all around the world. Mr Chidambaram would certainly make the best efforts to ensure that the new tax laws, direct or indirect, get into implementation when he presents the 2013/14 budget — again another pre-election year. There would be abundant caution on the part of UPA-II in making new ventures. In the coming months, all efforts would therefore have to be concentrated on re-railing the economy on a robust growth path, with as much reform content that would be widely acceptable, so that the UPA-II does not run into a patently anti-incumbency factor. The political role of mediating for a broad consensus for fiscal reform would continue to rest on the Prime Minister.
Meanwhile, there is much more to do at home with a sense of urgency, as in the energy, transport and services (telecommunications) sector, especially in the context of the risks posed by the global economic crisis. This would involve greater co-ordination of concerned ministries with active intervention of PMO, though the latter’s efforts in the coal-power sector are yet to bear fruit. (IPA Service)