UPA accumulates bungling on economic front
By S. Sethuraman
UPA-II seems to have arrived at wits-end on the economic front – Mr Chidambaram first unleashing FDI reforms in droves over a year to kick-start growth recovery, and finding no takers abroad, makes a swing to controls-not exactly back to 1991, we are assured, but for overcoming external vulnerabilities.
The Reserve Bank under Dr Subbarao, which gallantly took the inflation fight from unwilling hands in Government but nevertheless upbraided for “ignoring” growth, has now dutifully put through a host of toughening measures on outflows and remittances mainly of corporates, with a marked preference to invest in assets abroad than in a besieged economy at home.
A Finance Minister, who has pampered the corporate sector all along, is hardly able to get them into investing here, concerned as they are with the inflation and resulting costs for enterprises, policy inadequacies and action failures, factors that have thwarted investment revival. A quarter or a half percentage cut in repo rate such as would please Mr Chidambaram cannot do the trick with unresolved supply constraints.
External imbalances, compounded by the rapacious market forces operating in a globalised economy, and uncontrolled inflation at home, have pushed the country into a crisis in the form of a falling rupee with volatile markets, further veering investors away. Government cannot also take away the glitter of gold whatever its taxing and other curbs, though it has to be part of the armoury.
Now, the Prime Minister Dr Manmohan Singh, who launched the era of liberalisation with the political backing of former Prime Minister Narasimha Rao, has listed, in his Independence Day address, the accomplishments of UPA rule over a decade. But while gloating over “high growth” of the past, he merely noted that “growth has slowed down at present and we are working hard to remedy the situation”.
Both PM and Finance Minister have generalised the problem as one of slowdown everywhere, all developing countries included, as if otherwise, India’s macro-economic situation is infallible and whatever difficulties are being experienced are spillover effects from an uncertain global environment. But the fact remains that all the initiatives of the Finance Minister, except in regard to fiscal deficit, have come to nought.
The Prime Minister hopes that “in the coming months, we will see “visible results” of the efforts to increase investment and accelerate growth with improvements in the infrastructure sector. He has tried to sound a note of cheer in a totally depressing environment, as the economy struggles to maintain even the low 5 per cent growth of last year. With undue reliance on externalities, ignoring all domestic ills, a strong growth revival can become a will-o’-the-wisp.
For the present, and with an election which is dictating what is politically feasible to do or venture into long-neglected structural reforms to revive and foster growth, economic management seems to be limited to what best could be done to prevent fiscal and foreign exchange imbalances getting out of hand, by the Finance Ministry and the Reserve Bank banding together.
But on the morrow of independence day, it was a ‘Black Friday’ which saw a 769-point plunge in the premier stock market, the rupee falling to a record low of rs.62 to the dollar, a surge in gold prices with nervous investors rushing for ‘safe haven’ for cover, and a deepening of the gloom. The Finance Minister dismissed it as one of the market becoming over-sensitive to data flowing from America instead of reflecting Indian market conditions. This sounds simplistic in a globalised setting.
It is true the week coincided with a sharp fall in the Dow Jones industrial and other key market indices, despite emerging positive trends of growth pick-up and consumer sentiment in USA. US investors are now concerned with the likely tapering off of the asset purchases (Quantitative Easing), by the Federal Reserve, from September itself. The final signal is awaited at the Federal Open Market Committee (FOMC) meeting in mid-September.
Phasing out of QE would give a further push to the already rising bond rates and raise borrowing costs for investors and mortgage loans, at a time of incipient recovery in the American economy. But this can also affect capital flows to the slowing emerging markets. Overall, however, there is a visible turn for growth not only in USA but also in the 17-zone Eurozone, just emerging out of a recession, while Japan’s economy is also looking up with monetary stimulus and exchange rate depreciation.
Global analysts view these trends as a shift in the balance of growth for the world economy at present to the old major economies given the weakening in emerging markets. America will gain if Chinas makes progress with rebalancing of its economy linked to increased domestic consumption. For India, the narrative gets down to inefficiency and graft as the hurdle.
The role of RBI has come to the fore in the context of the elevation of Dr Raghuram Rajan, acclaimed as a star economist with a global perspective, as Governor of RBI, to take over from Dr D. Subbarao on September 5. The extensive commentary on the development pinpoints the circumstances surrounding the succession in Mint Street, especially the Finance Minister’s critical approach to RBI’s handling of monetary policy with primacy given to inflation control over growth and wonders what options Dr Rajan could have when inflation is trending upwards and the rupee has kept falling.
Mr Chidambaram has now sought to reset the terms for monetary policy with the criteria of price stability, growth and maximising employment and would like Parliament to send a strong message to the central bank. Taking a cue from President Obama the way he defined US monetary policy, Mr Chidambaram has added employment to buttress the growth objective as the key determinant in monetary policy.
Price stability had remained elusive over the last five years of UPA-II and there are no reliable data if growth in better times had generated commensurate levels of employment. All that is talked about more is part-time rural employment on doles from MNREG and rise in rural wages. That way the UPA-II has little to show in terms of real relief to the poor in both rural and urban areas. (IPA Service)