S. Sethuraman
In another bolder act of retrieval to climb out of the depths into which it had landed by its own commissions and omissions, UPA-II has suddenly unleashed big ticket reforms, which it had held up all along seeking an elusive political consensus. This speaks more of desperation, yet inevitable to re-create some confidence and credibility for UPA-II as it lingers on for the rest of the term and, even more, to restore some credibility and give a push to a faltering economy, wounded by inflation and low growth.
On Sep 13, UPA Government, in a show of political defiance, raised diesel prices at a level, the consequences of which would be felt both in terms of higher inflation for the near term, and of confronting a combined opposition campaign of rollback with added fury over opening up of multibrand retail sector to multinationals, BJP, SP and TMC taking the lead.
On September 14, Government announcements covered large areas for FDI penetration – multibrand retail at 51 per cent, with the global behemoth Wal-Mart in wait, a significant liberalisation of restrictions on FDI in single-brand (IKEA moving in), allowing foreign participation (including foreign airlines) in aviation sector at 49 per cent, and fixing 74 per cent in broadcasting and 49 per cent in power-exchanges sectors.
Domestically, given the role of disinvestment in PSUs in bridging the fiscal gap, reinforced by the Kelkar panel, the Cabinet approved disinvestments in the range of 9.33 to 12.15 per cent, in four major undertakings, Nalco, Oil India, Hindustan Copper and MMT, all designed to yield about Rs.15,000 crores, half of the budgeted Rs.30,000 crores in fiscal 2013.
UPA’s reform agenda has now been laid bare along with first moves to cut fiscal deficit and bring clarity in tax policy to remove post-budget apprehensions of foreign firms, probably in line with the Shome Committee recommendations on deferment of GAAR for three years, with some additional safeguards. More steps, some harsh to spread burden-sharing for fiscal prudence, have been held out, and these would follow in coming weeks.
Decisions already taken, it is hoped, would help abort threats of credit downgrading by global rating agencies. While UPA has focussed on creating the climate for a strong resumption of capital flows, especially direct investment, duly welcomed by Indian business, it is yet to tackle effectively the infrastructure sectors, especially coal-based power, a major constraint for the revival of domestic investment by corporates with cash hoards.
Mining and land acquisition problems have not so far been addressed and how far Government could push through new legislation on both and pending amending laws in financial sector, given the hostile political atmosphere, remains to be seen while uncertainty surrounds the winter session of Parliament. .
However, with capital markets upbeat globally in the wake of US Fed’s decision to embark on QE3 by purchase of 40 billion dollars of mortgage-backed debt every month to bring unemployment down, and the European Central Bank’s moves to go to rescue of indebted euro-zone countries, UPA’s reform moves look well-timed to attract capital inflows. This would also help to make a success of the disinvestment drive with Sensex hitting new highs, triggered by reform measures as well as in reflection of the surge in global stocks.
Until recently, one of the refrains of the Prime Minister has been that there are no external solutions to India’s problems. The big bang reforms, however, show the degree of the economy’s dependence on foreign capital, though the usual contention is it has only a small role. It also underlines how utterly we have failed at home, let alone containing inflation while building mountains of subsidised foodgrains, in increasing productivity and diversifying agriculture, effectively delivering services to targeted sections, and providing overall accountability and transparency.
Till recently, UPA had gloated over the 8 to 9 per cent growth to claim for India the status of the second fastest economy. The Prime Minister Dr Manmohan Singh believes that the slew of bold decisions taken on September 14 would “bolster economic growth and make India a more attractive destination for foreign investment”. The ailing economy needs no less also with our current account deficits adding to BOP strains when the reserves are no longer on a robust path and external debt has been rising.
But the Prime Minister, conscious of the political fights still left on the road, remarked, “If we have to go down, we would have to go down fighting”. He is confident reforms would put the economy in the growth process, thereby again underscoring the Congress-led UPA’s nine per cent growth obsession. ‘ Growth first and everything else afterwards’ may be taken as its face value, but the long-discarded ‘trickle down’ theory to which UPA’s ostensible ” inclusive growth” is tied, has not taken the country any nearer to elimination of poverty or universalisation of literacy or provision of basic facilities for the mass of the people. It seems to call for endless perseverance.
Coinciding with the reform push, inflation had jumped to 7.55 per cent in August, reversing a declining trend in WPI, with disturbing rise in food inflation, and core inflation also moving up to 6.14 per cent, leaving no scope for RBI to relax its focus on inflation control. International commodity prices are also on uptrend and what the central banks have done in USA and EU could have a mix of positive and negative impact.
Most economists see no justification, despite the industrial slowdown, for RBI to re-embark on rate cutting, after its solid 50 basis point bringing down the repo rate to 8 per cent in April last. The August WPI and food inflation data do not provide the slightest comfort for the central bank. Nevertheless, a section of policy-makers and apex chambers, unmindful of ballooning inflation, share the hope that RBI would make a gesture for growth, complementing the Government’s fiscal and reform measures, without lowering its guard on inflation control. It could be a small cut in repo or CRR, analysts presume. RBI would have its own story on September 17.
The foreign press including the London Economist, Wall Street Journal and the New York Times have greeted India’s reforms. The Economist calls it “welcome boldness” while the New York Times sees the backing for foreign investment in retail as “pushing for a profound shift in India’s economic and political direction”. The decisions, according to NYT, have been taken at a time of a sharp slowdown in the economy and “a sense of impending political collapse”. (IPA)
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