One step forward, two steps backward

One step forward, two steps backward

After a long halt, the government appears to be gaining momentum on economic reforms once again, perhaps to remove the sticky image that it is suffering from ‘policy paralysis’.

Right from the meeting of the Congress Working Committee (CWC), the government’s highest decision-making body, where the deliberations revolved around correcting the sluggishness in the economy, to the Prime Minister Manmohan Singh calling a meeting of all key economic ministers to give an infrastructure push to economic growth, suggest that the government is racing against time to put the economy back on track before it enters the 2014 General Elections.

Singh has set infrastructure goals for the coming year in the realms of power, roads, railways, aviation and shipping to revive investment and reverse the economic gear back to growth path.

The recent decisions to perk up the economy have come after concerns were raised from various quarters about sluggish gross domestic product growth, stubbornly high inflation, widening fiscal, trade and current account deficits (CAD) and a policy inertia dampening the business sentiment.

The GDP growth slumped to its lowest level in nine years in the first three months of 2012, leading to a sharp criticism of UPA’s economic management.

Slow decision-making by the government in the wake of corruption scandals is often held responsible for choking growth and the drive to become an industrial nation.

Similarly India’s trade deficit (surplus of imports over exports) mounted to $185 billion in the year 2011-12, the highest so far.

Investor unfriendly

Secondly, foreign investment, which usually funded the trade deficit, dropped significantly. The year 2011 saw a net outflow of hot money. In 2012 again, the trend continued except for January and February when India saw the return of FIIs.

The government was criticised for announcement about GAAR, but the subsequent months saw the money draining out again, mainly because of budget announcements about GAAR and retrospective tax changes.

The high demand for dollars for oil and other imports forced the rupee to fall. The falling rupee, in turn, adversely effected foreign investment and led to further fall in the Indian currency. And all these weakening macro-economic indicators led to global bodies questioning the government’s intention about carrying forward the much-needed reform process.

The International Monetary Fund (IMF) lowered India’s economic growth forecast for 2012, so did a few others. And more recently, global rating agency Standard and Poor’s revised India’s long-term credit rating to negative from stable, sending overseas borrowing costs for domestic companies soaring and exerting pressure on the government to kick start some key reforms.

Against this backdrop, almost all key ministers of  UPA have swang into action to quicken the reform process. They are making the right noise, at last, experts opine.

The government has recently set up a high-level inter-ministerial board under Commerce and Industry Minister Anand Sharma to boost the manufacturing sector, important for India’s trade and employment generation.

There are moves from Civil Aviation Minister Ajit Singh to persuade UPA ally Trinamool Congress (TMC) to come on board to allow foreign players buy stake in Indian carriers. Singh is also in talks with DMK on the issue.

Finance Minister Pranab Mukherjee has gone on record saying the reforms in the retail sector is soon going to be revived and Chief Economic Advisor Kaushik Basu assured the investor community that India has a contingency plan ready, should Greece exit the European Union and flare up the euro zone crisis.

There are different crisis management groups in the government to deal with such scenarios, he told a foreign newswire. The Prime Minister himself recently told the key ministers from infrastructure sector recently called infrastructure meeting that urgent steps were needed to revive investors’ confidence and reverse the process of growth to pre-crisis level of 2008. (See chart: Singh’s prescription)

He wants at least Rs 2 lakh crore worth of investment in the sector in the current fiscal to revert back to 9 per cent economic growth. “At a time when the Indian economy is going through a tumultuous phase, PM’s initiative was a clear indication of the government’s commitment to improve coordination among different ministries to give a boost to infrastructure sector,” CII Director General Chandrajit Banerjee said.

CII said, it has strongly recommended a push to infrastructure development which could be used as a tool to create demand and sustain growth momentum.

India faces the challenge of building infrastructure almost from scratch. And to grow at a faster clip without stoking inflation, the government has chalked out an investment plan of about $1 trillion in the sector over the next five years.

“These are timely and most needed efforts to bring back 8 to 9 per cent growth or else India might miss the bus very soon,” said N R Bhanumurthy of National Institute of Public Finance and Policy.

He also believes that some of the economic sector reforms such as Foreign Direct Investment in multi-brand retail, Goods and Services Tax and Direct Taxes Code, if implemented without delay, could prove to be a game changer.


Political challenges


Then there are reforms in two key sectors of pension and insurance. These have sizeable investment potential and a multiplier impact on the economy and they can mop up fund for long-term investments, according to other experts.

But, from the pension bill, fuel price hikes, land acquisition proposals, to bills which proposed increasing foreign investments in multi-brand retail and aviation, all of them have been opposed by Mamata Banerjee, chief of Trinamul Congress, a key ally of the UPA government. She has dubbed them all ‘against people’s interest’.

The most recent example being her party colleague and Railway Minister Mukul Roy scuttling the pension bill from coming up in the cabinet. This is the second time that Trinamool has been successful in getting the bill dropped from the cabinet agenda, the last being in December 2011.

Such oppositions to government’s intent to roll out reform, analysts think, lead to a major concern that the Singh government is always vulnerable to Trinamool pressure after almost giving an assurance that it was serious on getting the pension bill passed.

Some said it is the July presidential election, where the Congress party needs support for its candidate, is making the government bow down to Trinamool pressure, while others believed that Mamata is bargaining to get around Rs 25,000 crore from the Centre to bankroll West Bengal from its annual debt burden and has put this condition on the government before saying yes to anything.

With 19 members in the Lok Sabha, Banerjee’s party has been a stumbling block for the UPA coalition for months and political analysts are of the view that the government needs to seriously start thinking about replacing her in the coalition.

Retail reforms

But they opine that government must not hesitate in pushing some reforms such as permitting FDI in multi-brand retail, which  requires only an executive decision. Last week, Assam Chief Minister Tarun Gogoi also spoke in favour of bringing foreign investment in multi-brand retail.

He even suggested that states can be given a final say on permitting FDI in retail to enter their territory. That way, states that are keen can implement retail reform, others will eventually be compelled to follow suit.

“The government needs to take some bold steps now, which offer tangible gains immediately and end uncertainties on the policy front,” said Foundation for Public Economics and Policy Research Director Mahesh C Purohit.

He also remained unconvinced that the government’s latest move would revive economic growth as little was done to change conditions on the ground that have slowed development, such as land acquisition and environmental clearances.
“The roadblocks to reforms will be many, but it depends on the government how it chooses a safer path,” he said.

The current roadblock, of course, is from UPA’s own ministers. Most key infrastructure ministries are at loggerheads with each other.

Experts say a greater cohesion is needed in the government to come out of this.
Prime Minister Manmohan Singh has raised concern over the lack of coordination between the ministries during the last meeting to take stock of infrastructure projects, but it remains to be seen how far these ministries succeed in getting things done.

The latest to show his anguished over delay in key reforms is Securities and Exchange Board of India Chairman U K Sinha, who said it has been for “years and years” now that some of the reforms are pending. He said if India wanted to go back to the 2008-09 growth path, reforms such as FDI in multi-brand retail, pension reforms and insurance reforms are urgently needed.

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