By S Sethuraman
After a traumatic August – Anna Hazare and Baba Ramdev fasts delivering ultimatums to the Congress -led UPA Government, and CAG’s new swipe on the latter’s allocation of coal blocks at a loss the Federal auditor puts at Rs.186,000 crores – the Manmohan Singh Government, unflappable as ever, looks to September hopefully to give a new sense of direction for the beleaguered economy. It has meanwhile to steer through stormy scenes in Parliament for the rest of the session till the first week of September.
Government’s rebuttal of policy indiscretions pointedly cited by CAG, however plausible, will not make any difference to the BJP-led opposition onslaughts in Parliament and outside, adding more fuel to their fire against the Congress in the run-up to national election in 2014. BJP has already called for the resignation of Prime Minister whom, it contends, had held the charge of Coal Ministry in 2006-09 and dithering and delays at that end had caused private gains at cost to the Exchequer.
Lack of a clear cut policy in regard to allocation of land, mineral and other natural resources for industrial and infrastructural developments involving private sector has hobbled the UPA Government throughout, leading to the 2G spectrum scam where the telecom licenses awarded indiscreetly were cancelled by the Supreme Court, with firm direction to Government to take the auction process in all such cases.
Having allowed chronic delays and blaming “coalition compulsions” for its ad hoc responses to evolving situations, the UPA-II has now sought a clarification from the apex court whether it should go only by auction for all resources, besides spectrum licences. Competitive bidding was also not opted for in coal block allocations. Government contends that the allocation was to “induce rapid development of infrastructure (power) essential to keep the economy on high growth trajectory, by involving the private sector in capacity creation in identified priority sectors.
The Central Government, it maintains, did not reckon it as a “revenue generating exercise” and in allocating, it had to keep in view the need to create larger capacities in power, critical for the national economy, as well as other clearances the private sector required over time. Also, there were conflicting legal opinions on bidding procedures while some states were reluctant to assign coal blocks through auctions, Government said.
In his Independence Day speech on August 15, Prime Minister Manmohan Singh for the first time linked development issues to national security and attributed “policy paralysis” to lack of political consensus on “many issues”. Bringing inflation to the forefront – now acknowledged as one of the factors – along with lack of consensus, in the way of rapid economic growth, Dr Manmohan Singh said Government must “also control inflation”.
Relatively weaker monsoon this year has added to difficulties on the fiscal front with additional expenditure for drought-hit areas and could aggravate inflationary pressures. While WPI was below 7 per cent (6.87 per cent) in July, and subject to revision, primary and food articles in particular were all in double digits. The core inflation (manufactures) stood slightly lower at 5.58 per cent than in June but RBI does not yet consider it to be within comfort zone. Overall industrial output virtually stagnated in April-June quarter.
Nevertheless strong signals have been given by the Prime Minister and Finance Minister Mr Chidambaram on what Government proposed to do in the coming weeks to restore business and investor confidence and create a conducive environment. Mr Chidambaram has listed fiscal correction (a group of experts at work), tax clarity to allay misapprehensions of foreign investors on GAAR and retrospective application of tax laws (being gone into by the Parthasarathy Shome Committee of Experts), and attracting investments in mutual funds and insurance policies to raise the rate of savings.
The Finance Minister aims at hitting an investment target of 38 per cent of GDP in the near future and has said he would seek a reduction of “high” interest rates, speed up regulatory reforms, ensure tracking of investments and “fine-tune” policies to facilitate capital flows to India. Actions on removal of supply side constraints to control inflation and taking up of pending financial sector bills in Parliament have also been indicated.
Amid turmoils in Parliament, the Government may face headwinds in negotiating a political consensus on key legislation. This is apart from overcoming the resistance of its major ally, TMC to FDI and subsidy-related measures, in particular. Meanwhile, high-level efforts are on to bring round TMC Chief Minister of West Bengal Ms. Mamata Banerjee to take a positive view on at least some of the urgent issues.
Government now realizes that it has to move with some speed in initiating some of the announced reforms, especially at a time when India’s outlook is downgraded by global rating agencies and risk aversion on the part of foreign investors is still high. At the same time, UPA-II wants to ensure that it carries its allies with it, as far as possible.
Increasing the pace of economic growth with steps to revive domestic investment and improving the management of government finances are priority tasks for Government. The Prime Minister hopes the economy would grow slightly better than the 6.5 per cent in 2011-12. The Economic Advisory Council headed by Dr C. Rangarajan estimates GDP to rise by 6.7 per cent (with agriculture growth at 0.5 per cent, due to weak monsoon and reduced reservoir storages, manufacturing 4.4 per cent, industry as a whole 5.3 per cent, and services 8.9 per cent).
The Finance Minister said faced with challenges – global economy, twin deficits, inflation and industrial slowdown – “moderate growth” as in the previous year should not “dent our confidence”. Government had overcome similar challenges in the past, he said and has welcomed the measures announced by SEBI which are calculated to stimulate financial savings among households as well as give a fillip to the mutual fund industry.
The Reserve Bank awaits Government moves over the next two to three weeks both on fiscal side and supply side measures to take a balanced view of prospects for growth and inflation during the latter half of the year. It will determine the policy stance in the light of August WPI and CPI data in its mid-quarter review on September 16. A road map for fiscal consolidation is expected to help avert a sovereign rating downgrade, apart from enabling RBI to re-focus monetary policy now tilted more towards containing high inflation. (IPA Service)