By S. Sethuraman
However unpredictable the outcome at this stage of the 2014 national election, the new government, whatever its complexion, would be inheriting major challenges in reviving the economy. The fiscal situation, caught in a cyclical slowdown, reordering development priorities to conform to expectations raised for the electorate, and restoring India’s image as a robustly growing Asian power.
Implicit in the emerging mandate would be corruption-free governance and ensuring stable prices – two key issues that have dominated voter concerns primarily as well as corresponding to promises that may have been held out by parties in the race for power. Equally demanding would be meeting the aspirations of the middle classes for growth, jobs and skills to earn their way and contribute to the nation’s economy.
Much would depend on how strong and stable would be the successor to UPA-II, which would be exiting without an unblemished record of performance – to get down immediately to strengthening the macro-economic factors, by combining fiscally sound and externally viable policies, generating a favourable climate for business and investment, and outlining a comprehensive agenda of inclusive growth for economic and social development.
It would be good for the new government to set its goals and ambitions on a modest scale and deliver on them in the near to medium-term thereby strengthening investor and public confidence while earning credibility for embarking on longer-term objectives. A stronger government could be a harbinger of change and command greater respect at home and welcome attention abroad.
India’s relations with some of the major nations need to be mended even as its own legitimate interests are defended and safeguarded. Security, internal and external, has also to be at the top of priorities. The President’s address to the new Parliament is expected to outline a whole range of policies of the Government in regard to economic growth, social development, internal and external security and international affairs.
Undoubtedly, inflation remains an undiminished concern even if there may be some softening trend in recent weeks. Prices of all commodities, food and non-food, had been rising in recent years and may get stabilised at the higher levels at best, even if the wholesale and consumer price indices no longer surge as before. For the UPA Government, inflation had virtually become a non-issue in its pursuit of high growth while easing structural bottlenecks also lacked any vigorous pursuit.
Containing inflation and anchoring inflation expectations had thus become the preoccupation solely for RBI and the latter could succeed only to a limited extent in the absence of supportive measures by Government. The slowing growth of the economy over the last two years also reflects the negative impact of high inflation on domestic savings and capital formation. High food and fuel inflation have also had effects on core inflation.
In the proposed shift to CPI as the benchmark to guide monetary policy, it is now agreed that Government and Parliament would set the target for inflation for the RBI to frame its monetary policy. This again is a matter for the new Government to take up without loss of time. Meanwhile, RBI is due to announce its first bi-monthly monetary policy review on April 1. WPI and CPI data for January and February and industrial production trends in the last quarter of fiscal 2014 would be taken into account.
The Governor had gradually tightened monetary policy on three occasions since September last, taking the key lending rate to 8 per cent in the Third Quarter Policy Statement on January 28. While justifying the need for an increase on the last occasion because of upside risks to the central forecast of CPI at 8 per cent, Dr Rajan had said that if the disinflationary process evolved according to the baseline projection, “further policy tightening in the near term is not anticipated at this juncture.”
The election results would be declared on May 16. By the time a new Government takes over in the latter half of May, there would be more price and production data and overall GDP growth trends as revised upto the end of fiscal 2014. These could provide a solid base for setting the directions of both budgetary and price policies (inflation target) for 2014-15.
Finance Minister P Chidambaram had said recently that UPA Government had been able, in concert with the Reserve Bank of India, to bring down the current account deficit within manageable levels. CAD was reduced to 2.3 per cent of GDP in the first nine months of fiscal 2014 (April-December) as against 5.3 per cent in the corresponding period of previous year.
The next government will have to continue fiscal consolidation but it should not be at the risk of public investment in physical and social infrastructure. How it would approach the issue of reduction of subsidies, which could rise further with the implementation of the Food Security Act remains to be seen. In any case, expeditious moves have become imperative to proceed with major tax reforms like the Direct Tax Code and the Goods and Services Act.
It may also make some priority shifts while determining the allocations for plan programmes in the third year (2014-15) of the 12th Five year Plan in line with whatever commitments have been made in the manifestoes of parties gaining power. All the early moves of the new Government in terms of policy pronouncements including openness to foreign direct investment and steps to strengthen macro-economic and financial stability would be keenly watched abroad.
India has, however, to rely mainly on domestic demand and private consumption as post-crisis global recovery still remains slow pointing to prolonged slowdown in most of the developed world except for USA where growth is underpinned by supportive financial conditions and marginal relaxation in its budget constraints. China is already in the process of rebalancing its economy towards consumption-driven growth.
Long-term projections by OECD for Asian economies are for moderate levels of growth over the next five years for the two major emerging economies of Asia, China and India. India’s growth is projected at an average of 5.9 per cent for the five years 2014-18 and that of China at 7.7 per cent over this period. Both countries had recorded average growth rates of 7.1 and 10.5 per cent respectively in the pre-crisis 2000-07 years.
China and India will continue to play an important role in global growth despite their own moderate pace of growth. India’s resilience to withstand financial shocks is noted but OECD study does not rule out risk of capital outflows for developing economies as a result of US Fed scaling down of asset purchases in the current year and a gradual tightening of monetary policy envisaged over the next two years when its targets for unemployment and inflation are met.
In its latest economic assessment, OECD notes the Fed has refined communication of its policy to avoid ‘disruptive surprises’. But with increased financial market scrutiny of vulnerabilities of EMEs, there could be risks of market volatility and recurrence of capital outflows for some emerging economies. [IPA]