By S. Sethuraman
While UPA-II blames global uncertainty rather than acknowledging its own poor management of the economy, which has taken the country back to a near-crisis reminiscent of 1991, the road ahead is going to be even more challenging for sustaining even a relatively moderate growth at 7 per cent over the medium term.
Politically, we are headed for treacherous times. State or national elections apart, there are no short cuts to reverse the deficits, fiscal and current account, or stabilise the rupee, which has depreciated by over 11 per cent in a matter of weeks, imposing more burdens for the vast multitudes of urban and rural poor and the numerically overwhelming lower middle class – once the beacon light for attracting hoards of investment flows from abroad.
UPA-II modestly celebrated its eighth anniversary on May 22, the duration of sustained hold on power only underlining performance failures on most fronts – with only average growth (7.5 per cent) to brag about but steadily going down the ladder of universal human development index measuring social progress. This is a matter of global disgrace for the world’s largest democracy and a fast-growing economy.
With its flawed claims of poverty reduction under serious questioning at all levels, UPA-II has already set up a new panel under Dr C. Rangarajan to review the methodologies so far adopted and arrive at an “effective basis” for estimating rural and urban poverty. Nor in education or skills training the Government has made any significant headway even asIndiais already entering the era of “demographic dividend” on which we are building hopes to turn ourselves into the world’s leading economy by mid-century, outsizing China in terms of total and working-age population.
The Prime Minister Dr Manmohan Singh has played down the serious macro imbalances as temporary blips which could be corrected, and feels perceptions of policy paralysis are “misplaced”, contrary to “facts”. It was complacency all over for UPA-II from 2009 until scams erupted one after the other and Anna Hazare demonstrated people’s power to rise against corruption. UPA-II path thus far has been one of denials of ground realities, indifference to prolonged inflation and drift with few vestiges of governance.
Both the Prime Minister and the Finance Minister Mr Pranab Mukherjee have often underlined India’s “resilience” to overcome difficulties. They are satisfied that even growth at 7 per cent in spite of “adverse international economic environment” is among the highest in the world. And the Finance Minister who suddenly seemed concerned and talked of austerity and “unpopular decision-making” is satisfied that once global situation improves, everything would be back in place in India.
Candidly, the Prime Minister has himself enumerated the problems – the same old challenges he has mentioned from the first year of UPA onwards, and still on the waiting list. UPA-II is not blamed for lack of diagnosis but for its inability to confront the known devils and overcome them. PM says “difficult decisions” have to be taken on both spending and revenue mobilisation, implementation bottlenecks holding up large projects, such as land acquisition and environment clearances, have to be removed, and pace of implementation of inclusive growth policies, particularly in the areas of health and education, stepped up.
Most of internal reforms, barring selective subsidies do not suffer from “coalition politics”. Rather than getting down to dirtying hands with these tasks, the leadership prefers easier options of FDI taking over key areas like supply chains and farm productivity in their own ways. Some hasty announcements in this regard had to be rolled back. The Finance Ministry did one better, with its somersault on taxing – with retro-active provisions and other disincentives built into the 2012-13 Budget. Result – More outflows of FDI and FII, rise in dollar demand, rupee sinking, adding to inflationary pressures and widening of current account deficits and some erosion of reserves..
The latest Report Card of UPA-II did nothing to lift the gloom with any action programme for the next two years before the 2014 national poll. Even the Congress President Ms. Sonia Gandhi, apparently unimpressed, cautioned the Government that the outcome when the party seeks a new mandate would depend on “our work, not promises”.
Nor has Government thoughtfully deployed its policy instruments. Deregulation of petroleum product prices has long been on the agenda of governments, NDA and UPA. Mr Mukherjee had announced deregulation of petrol and diesel prices two years back. While cutting down subsidies is a highly sensitive issue for a coalition government and requires a consensus, there should be less resistance if increases are small and at longer intervals in a manner that both rises and falls in international prices of crude get reflected in adjusting product prices.
It is understandable that UPA-II is in no position immediately to bring deregulation into effect on diesel and LPG but the big bang increase in petrol prices, which are theoretically at least left to oil marketing companies to fix, was avoidable by proper management at the Governmental level. The fuel companies could have been allowed to do it in smaller doses in relation to international prices. This would not have evoked the country-wide protests including by UPA allies, like Ms. Mamata Banerjee leading demonstrations on Kolkata streets, which could snowball into a campaign to stall efforts at the urgently needed fiscal reform.
The Prime Minster should have convened a conference of all Chief Ministers and FM could have laid bare the ruinous impact of subsidising all oil products – especially diesel, LPG and kerosene – on public finance, which ought to be of as much concern for the States as the Centre. Efforts could also be made to work out a compromise on tax cuts on oil products by both the Centre and all states as well as on mechanisms to ensure that the low-income and other poorer sections are not harshly impacted. A time-table for effective implementation could also have been set to facilitate a gradual move toward elimination of administered pricing of petroleum products.
There is no sense of urgency at the Centre in dealing with the current macro-economic instability while the Reserve Bank keeps trying to arrest the continuing fall of the rupee and hold it at a certain level while intervening to curb speculation and also attracting NRI deposits at higher interest rates. The RBI is also looking at option to sell dollar to oil companies to ease pressure on rupee. But the real solution to keep the rupee relatively stable and also bridge the alarming increase in current deficit is to attract capital flows.
It is for Government to create an environment for promoting capital flows as well as to revive domestic investments in the economy. These would necessarily follow clearly-defined policies and actions set in motion to balance domestic finance (of which tangible subsidy reductions would be more important) and external payments which have come under strain in over two decades.
Disenchantment with UPA-II is not confined to the opposition parties, whatever their motives, and the media but also widely among global investment firms, international press and institutions. Persistently high inflation, the highest among emerging markets, is the “most telling macroeconomic manifestation” of the constraints India had got into, according to Mr Arvind Subramanian of the Peterson Institute of International Economics. In the absence of significant supply-enhancing reform, India’s growth rates of 6 or 7 per cent could become the norm.
Even IMF economists have expressed surprise over the extent of slowdown in India’s growth rate. In a paper, two of them, Roberto Guimarães and Laura Papi note that while India has been affected by the worldwide slowdown, many observers have started to question the inner strength of the Indian growth story. In their view, the slowdown in growth has been primarily due to falling investment, which is mainly due to domestic factors, such as high and volatile inflation, but not real interest rates. While structural factors also affect the business environment, the slowdown in investment, if it lasts, would translate into lower productive capacity, and lower average growth over time. (IPA Service)