Manmohan's last chance: Either reform or perish

Coming against the backdrop of deteriorating economic health and elections knocking at the door, this week’s Union Budget is probably the last opportunity for Finance Minister P Chidambaram to strike a balance between tightening the reins of a rundown economy and meeting the growing aspirations of the man on the street.

 But is it really the last opportunity for Chidambaram to set right what UPA delivered or didn’t deliver in the past 10 years of its rule? Or, a final chance for Prime Minister Manmohan Singh to measure how far India has moved since 1991 when he ushered in liberalisation and introduced reforms to change the fortunes of an  economy on the brink of bankruptcy.

In the summer of 1991, drawing strength from Victor Hugo’s phrase that no power on earth can stop an idea whose time has come, Singh gave India a new dawn promising bold measures to lift an economy almost in shambles. Twenty two years after the eventful start of a turnaround, during which Singh has been at the helm of North Block for five years and South Block for a good 10 years, India does not seem to have covered much distance. Has the new dawn faded into the twilight? A peek into the past does say the economy has come full circle. In 1991, when Singh became Finance Minister, India had an unsustainable fiscal deficit of close to 8.5 per cent of the gross domestic product. There was a huge balance of payments deficit. The current account deficit was close to 3.5 per cent of GDP and India had barely a billion dollars in terms of foreign exchange reserves — equalling roughly two weeks of imports.

In 2013, the Union Budget will be presented against the backdrop of economic growth projected to slip to 5 per cent, high inflation, fiscal deficit of 5.3 per cent, current account deficit at a historical high of 4.2 per cent (and expected to be close to 4.5 per cent), and an unmanageable trade deficit almost threatening  the current balance of payments. 

In a nutshell, the country is more or less facing the same problems it faced in 1991 that forced Singh to take a leap forward and usher in reforms in his epochal budget of that year. His budget philosophy was based on a free market economy and incentives to private investment for sustained economic growth along with other structural reforms. Today, after more than two decades, while Singh continues to hold the reigns, India struggles to give private investment a fillip. Government expenditure has gone wayward, revenue growth has been tepid because overall economic growth has slowed down and bloating subsidies have eaten up the exchequer from the inside. And, Chidambaram, who has taken upon himself the task of reining in floundering expenditure, is by and large resorting to slashing planned expenditure. According to finance ministry sources, Plan expenditure alone may be cut by 30 per cent from the budgeted Rs 5.2 lakh crore. That means only Rs 3.8 lakh crore will be spent. Such a steep cut has never happened earlier. 

But, experts say, squeezing planned expenditures can be just a one-year strategy, which may not be sustainable. Since Plan expenditure is also known as an asset-creation fund, the move resorted to by the government may result in bad economics in the long run.

Economists say that cutting Plan expenditure will mean the government further suppressing investments in the country, which are already on a low ebb as evident from the lower industrial expansion data.

According to economist Mahesh C Purohit, the long-term impact of curbing Plan expenditure will affect growth prospects and increase inflation. 

Here, it is pertinent to note that the government’s own estimates have said that economic growth may plummet to 5 per cent in the current fiscal year ending March 31. Though wholesale price inflation is down to 6.62 per cent, it is still way above the government’s and the Reserve Bank of India’s comfort levels. But, Chidambaram has promised to keep the fiscal deficit under control during his visits to Hong Kong, Singapore and London ostensibly to avert a ratings downgrade by global rating agencies. Hence, the austerity measures on the Plan side and a cap on further market borrowing for this fiscal year.

But economists feel the fiscal deficit can also be pruned by reducing non-Plan expenditure or revenue expenditure which is largely made up of subsidies, salaries and interest payments.

 “I think the country can well afford fiscal deficit of 5.6-5.8 per cent, when growth has slipped below six per cent. What the government should at this moment concentrate on is the revenue deficit, which has bloated out of proportion,” said India’s former chief statistician Pronab Sen.

 Sen also argued that the fiscal deficit can be capped at 5.3 per cent by squeezing expenses, but a credible path to a 4.8 per cent target for next year must entail more serious revenue mobilisation efforts.

 Therefore, the challenge today remains one of getting onto the growth path without the accompanying inflationary pressures, spurring private investment for long-term and sustainable economic growth and bringing in more transparency in taking decisions affecting a large number of people.

 What may have been erased from public memory is that Singh, who is credited with ending the infamous licence raj as finance minister in 1991, had noticed during his tenure as Prime Minister a few years ago that a variant of licence raj was creeping in through the backdoor. He was referring to the arbitrary manner in which some of his ministers had ordered major projects to close down, displaying the sort of arrogance that was routine in the days of the licence raj. 

Has the Indian economy gone back to the point from where Singh had started in 1991? This will be watched curiously in the days to come.