Creating ‘sentiment’ for rebulding growth
19 Oct 2012 3:23 AM IST
The burst of ‘reforms’ unleashed by United Progressive Alliance-II, with a sense of desperation to manage a largely home-grown crisis, has had its positive first round, gaining for itself some credibility across the global community and acclamation from our own corporate breed. However, with our deep-seated problems, these reforms, some yet to cross political hurdles – a factor taken note of by foreign investors – will have no dramatic impact for at least a couple of years.
While Finance Minister P Chidambaram may be moving methodically on his roadmap for economic revival, and intends to draw up a ‘flexible’ fiscal plan, it may do little to change the internal dynamics such that GDP growth can be salvaged at not below 5.5 to 6 per cent this year. Even as they have welcomed the new reform push, pessimism runs through the IMF, World Bank and ADB assessments on its impact over the medium-term outlook.
The rating agency S and P, which has already lowered likely growth to 5.5 per cent this year, has renewed threat of sovereign credit rating downgrade if fiscal, external and political factors worsen in the coming months. Our corporates, given their confidence in Chidambaram, keep cheering his steady announcements but are looking for ‘substantial follow-up actions,’ as one CEO put it, in regard to struggling projects, such as in the coal-power sector, removal of structural deficiencies, a clearer picture on fiscal consolidation and on moderating inflation.
Overall, it would be difficult to achieve a pace of progress for the economy that would help to restore growth to not less than its potential [assumed at eight per cent] until after 2014. Chidambaram acknowledges that businessmen are still in a ‘wait and watch mode’ but he is confident that investments would pick up in the 4th quarter of the current financial year. This would depend on what happens on the policy front over the next crucial three months, on fiscal path, tax clarity and financial sector reforms [insurance, pension and banking laws] in winter session of Parliament. One objective of finance minister on stabilising the rupee is nearing realisation with its appreciation by over six per cent which would have beneficial impact on import costs, especially oil, and marginally though on subsidy reduction.
None of the international institutions shares the UPA-II view that our problems have arisen mainly due to the weak global environment, and, listing ‘home-grown woes’ including persistent inflation, they have revised down growth estimates for fiscal 2013 to 4.9 per cent [IMF], 5.6 per cent [ADB] and 6 per cent [WB]. And they expect some improvement in growth in fiscal 2014 at 6 to 7 per cent.
While recent reforms have created ‘a surge of optimism’ that more are on the way and government may ‘finally’ start to rein in the budget deficit, IMF noted, ‘[T]he pushback against the reforms has created some short-term political uncertainty that is holding back economic activity.’ In view of ‘vulnerabilities’ including large budget and current account deficits, IMF said, ‘guarded optimism’ has replaced ‘the overwhelming sense of malaise’. The World Bank says its six per cent projection for fiscal 2013 is predicated on an improving domestic and external environment, ‘but the risks for a worse outcome are high.’
In the current messy political scenario and the spectre of snap polls in 2013, UPA-II having been reduced to minority status and continuing to depend on uncertain outside support, even the best plans of Chidambaram may encounter some strains on the way. It is, therefore, that at least on fiscal correction, both the prime minister and finance minister have made it clear that there would be no drastic reduction in fuel subsidy, which means that government would have to apply the axe elsewhere or increase revenues through vigorous disinvestments of not less than Rs 30,000 crores and look for some windfall gains from spectrum sales.Government may have arrived at the ‘reform or perish’ stage, rudely awakened to the deteriorating state of economy, but the impetus to overcome lethargy in the style of governance has much to do with the cacophony of corruption and whistle-blowing that goes on. Of course, all this has been sought to be covered up by finance minster coming forward to warn that there would be further economic slowdown without reforms, let alone the propagandist assertions that foreign direct investment [FDI] reforms would bring ‘billions of dollars and millions of jobs’, and usher in prosperity on farms.
More worrisome is the persistence of inflation into the future. Global agency forecasts do not point to any significant lowering of inflation or current account deficits – IMF estimates consumer prices at 10.2 and 9.6 over the next two years while WB expects WPI-based inflation at 8 and 7 per cent respectively. CA deficits are projected at 3.8 and 3.3 per cent of GDP [IMF] and 3.7 and 3.5 per cent [WB] for the two fiscal years 2012-2014 as against sustainable deficit of 2.5 per cent of GDP.
It is in this context of high rate of inflation that IMF has said that monetary policy should stay on hold ‘until a sustained decrease in inflation materialises’. This may run counter to the dictum that Chidambaram is advancing that government and monetary authority ‘must point, and walk, in the same direction.’ It is not as if RBI has not been factoring in the growth-inflation dynamics in calibrating its monetary stance. Their line of thinking is if inflation persistence is overcome and gets lowered to comfortable levels, it would have a positive spin off for strengthening growth and would get reinforced by monetary policy moves, without lowering focus on inflation management.
A pre-requisite often cited by RBI is supply-side actions such as removal of infrastructural bottlenecks, which would have a moderating impact on consumer prices. These are now at their highest levels ever, spread over not only basic and other food articles [including rice, pulses, edible oils and other protein foods] but across the wide spectrum of manufactured products including medicines, the burden of which is borne by hundreds of millions of unprotected poorly paid people.
Government has been indulging in mindless ‘base-effect’ comparisons to claim ‘softening of inflation’ now and then and contending that high food prices are caused by people consuming more because of prosperity ushered in by UPA.
In the run-up to the Second Quarter Policy Review to be announced by RBI on 30 October, banks have suggested further lowering of CRR which is now at 4.5 per cent to give them more cushion and that would help to lower lending rates. The central bank would take into account new industrial and WPI data that would become available in mid-October before calibrating its policy stance for the second half of the year. Chidambaram perhaps thinks that with whatever has been done on his side, a policy rate cut would go down well and create some added bang. But IMF holds the view that real interest rates in India to become a significant growth constraint.
While the finance minister is working on both a modified fiscal path and on clarifying tax policies in the light of the Shome Committee report, the next steps must give the central place to speedy actions on infrastructure which would help to ease supply bottlenecks and also attract investors, domestic and foreign, helping to secure capital inflow and contain inflationary spiral. IMF’s emphasis is equally on structural reforms to improve supply, apart from boosting growth and fostering global demand rebalancing. It calls for reaccelerating infrastructure investment, especially in the energy sector along with the new tax and spending policies, designed to reduce or eliminate subsidies, while protecting the poor.
While Finance Minister P Chidambaram may be moving methodically on his roadmap for economic revival, and intends to draw up a ‘flexible’ fiscal plan, it may do little to change the internal dynamics such that GDP growth can be salvaged at not below 5.5 to 6 per cent this year. Even as they have welcomed the new reform push, pessimism runs through the IMF, World Bank and ADB assessments on its impact over the medium-term outlook.
The rating agency S and P, which has already lowered likely growth to 5.5 per cent this year, has renewed threat of sovereign credit rating downgrade if fiscal, external and political factors worsen in the coming months. Our corporates, given their confidence in Chidambaram, keep cheering his steady announcements but are looking for ‘substantial follow-up actions,’ as one CEO put it, in regard to struggling projects, such as in the coal-power sector, removal of structural deficiencies, a clearer picture on fiscal consolidation and on moderating inflation.
Overall, it would be difficult to achieve a pace of progress for the economy that would help to restore growth to not less than its potential [assumed at eight per cent] until after 2014. Chidambaram acknowledges that businessmen are still in a ‘wait and watch mode’ but he is confident that investments would pick up in the 4th quarter of the current financial year. This would depend on what happens on the policy front over the next crucial three months, on fiscal path, tax clarity and financial sector reforms [insurance, pension and banking laws] in winter session of Parliament. One objective of finance minister on stabilising the rupee is nearing realisation with its appreciation by over six per cent which would have beneficial impact on import costs, especially oil, and marginally though on subsidy reduction.
None of the international institutions shares the UPA-II view that our problems have arisen mainly due to the weak global environment, and, listing ‘home-grown woes’ including persistent inflation, they have revised down growth estimates for fiscal 2013 to 4.9 per cent [IMF], 5.6 per cent [ADB] and 6 per cent [WB]. And they expect some improvement in growth in fiscal 2014 at 6 to 7 per cent.
While recent reforms have created ‘a surge of optimism’ that more are on the way and government may ‘finally’ start to rein in the budget deficit, IMF noted, ‘[T]he pushback against the reforms has created some short-term political uncertainty that is holding back economic activity.’ In view of ‘vulnerabilities’ including large budget and current account deficits, IMF said, ‘guarded optimism’ has replaced ‘the overwhelming sense of malaise’. The World Bank says its six per cent projection for fiscal 2013 is predicated on an improving domestic and external environment, ‘but the risks for a worse outcome are high.’
In the current messy political scenario and the spectre of snap polls in 2013, UPA-II having been reduced to minority status and continuing to depend on uncertain outside support, even the best plans of Chidambaram may encounter some strains on the way. It is, therefore, that at least on fiscal correction, both the prime minister and finance minister have made it clear that there would be no drastic reduction in fuel subsidy, which means that government would have to apply the axe elsewhere or increase revenues through vigorous disinvestments of not less than Rs 30,000 crores and look for some windfall gains from spectrum sales.Government may have arrived at the ‘reform or perish’ stage, rudely awakened to the deteriorating state of economy, but the impetus to overcome lethargy in the style of governance has much to do with the cacophony of corruption and whistle-blowing that goes on. Of course, all this has been sought to be covered up by finance minster coming forward to warn that there would be further economic slowdown without reforms, let alone the propagandist assertions that foreign direct investment [FDI] reforms would bring ‘billions of dollars and millions of jobs’, and usher in prosperity on farms.
More worrisome is the persistence of inflation into the future. Global agency forecasts do not point to any significant lowering of inflation or current account deficits – IMF estimates consumer prices at 10.2 and 9.6 over the next two years while WB expects WPI-based inflation at 8 and 7 per cent respectively. CA deficits are projected at 3.8 and 3.3 per cent of GDP [IMF] and 3.7 and 3.5 per cent [WB] for the two fiscal years 2012-2014 as against sustainable deficit of 2.5 per cent of GDP.
It is in this context of high rate of inflation that IMF has said that monetary policy should stay on hold ‘until a sustained decrease in inflation materialises’. This may run counter to the dictum that Chidambaram is advancing that government and monetary authority ‘must point, and walk, in the same direction.’ It is not as if RBI has not been factoring in the growth-inflation dynamics in calibrating its monetary stance. Their line of thinking is if inflation persistence is overcome and gets lowered to comfortable levels, it would have a positive spin off for strengthening growth and would get reinforced by monetary policy moves, without lowering focus on inflation management.
A pre-requisite often cited by RBI is supply-side actions such as removal of infrastructural bottlenecks, which would have a moderating impact on consumer prices. These are now at their highest levels ever, spread over not only basic and other food articles [including rice, pulses, edible oils and other protein foods] but across the wide spectrum of manufactured products including medicines, the burden of which is borne by hundreds of millions of unprotected poorly paid people.
Government has been indulging in mindless ‘base-effect’ comparisons to claim ‘softening of inflation’ now and then and contending that high food prices are caused by people consuming more because of prosperity ushered in by UPA.
In the run-up to the Second Quarter Policy Review to be announced by RBI on 30 October, banks have suggested further lowering of CRR which is now at 4.5 per cent to give them more cushion and that would help to lower lending rates. The central bank would take into account new industrial and WPI data that would become available in mid-October before calibrating its policy stance for the second half of the year. Chidambaram perhaps thinks that with whatever has been done on his side, a policy rate cut would go down well and create some added bang. But IMF holds the view that real interest rates in India to become a significant growth constraint.
While the finance minister is working on both a modified fiscal path and on clarifying tax policies in the light of the Shome Committee report, the next steps must give the central place to speedy actions on infrastructure which would help to ease supply bottlenecks and also attract investors, domestic and foreign, helping to secure capital inflow and contain inflationary spiral. IMF’s emphasis is equally on structural reforms to improve supply, apart from boosting growth and fostering global demand rebalancing. It calls for reaccelerating infrastructure investment, especially in the energy sector along with the new tax and spending policies, designed to reduce or eliminate subsidies, while protecting the poor.
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