Slow economic growth marks 2012

Sluggish economic growth, stubborn inflation, widening fiscal, trade and current account deficits, collapse of corporate investment and a government accused of policy inertia and corruption — the Indian economy saw it all and more in 2012.

The year that began on a sticky note for the economy, got trickier with two key budget announcements -- retrospective taxation on corporate deals and the General Anti-Avoidance Rules (GAAR). A reversal of the policy paralysis came only towards the end the year, which many called an image makeover exercise by the government ahead of 2014 General Elections.

The government’s decision to allow foreign individual investors, pension funds and trusts to invest directly in Indian equities — the first whiff of reforms that attempted to shore up investor confidence and attract money from overseas to bridge the widening CAD — could barely boost depressed business sentiments in the wake of high interest rates that chocked investment growth.

After backtracking on some of its boldest reforms in years, such as the part foreign ownership of multi-brand retail and rail fare hike under huge opposition pressure, the government treaded cautiously and avoided any major reforms in the Budget for 2012-13.

It, however, pegged the economic growth at 7.6 per cent for the entire fiscal, despite a weak global economic recovery and not too supportive domestic factors. The efforts to perk up a slowing economy and reform slackness got a severe jolt by a sudden disclosure by the CAG that India lost up to Rs 1.86 lakh crore in revenue by giving away coalfields to bidders at throwaway prices.

This, along with a couple of policy missteps brought the business of the government almost to a standstill and Asia's third-largest economy, once boasted near double-digit growth, slipped to a decade low of 5.5 per cent in the quarter ending June.

A weak economy has also hit tax revenues, compounding the nation's fiscal woes and raising the spectre of a credit rating downgrade. Global rating agencies threatened to downgrade India's sovereign credit rating to junk if it failed to put its fiscal house in order.

The end of June also saw the rupee touch a record low of 57.14 to a dollar, but this was the time when the Finance Ministry witnessed a change of guard with incumbent Pranab Mukherjee moving to Rashtrapati Bhawan and Prime Minister Manmohan Singh taking charge of the economy directly into his hands. A seasoned economist and the architect of India’s economic liberalisation, Singh directed urgent steps for revival of waning investor confidence and reversal of the pessimistic climate with regeneration of ‘animal spirit’.

Tax issues

He identified tax issues, specially the retrospective taxation and GAAR, sluggishness in insurance sector and aspects related to mutual funds as problems and pressed for quick corrective measures. Stalled reforms got a tad breather with P Chidambaram taking reins of the Finance Ministry but monsoon vagaries raised spectre of a drought in India’s agriculture dominated economy just at the time when global prices hit record high.

It was in the backdrop of India’s unstable fiscal and current account scenario, declining FDI and portfolio investment, uneven monsoon, rising inflation and falling business and political confidence that Chidambaram unveiled a raft of reforms, such as diesel and LPG price hike, opening up retail, aviation, insurance, pension and power trading to foreign direct investment. He also set up a committee headed by Parthasarathi Shome to suggest amendments to GAAR and retrospective tax issues that had rattled investors.

The diesel and FDI policy were announced in mid-September but at a political cost. Large-scale protests by citizens and political parties were witnessed and a long-term ally Trinamool, walked out of UPA coalition.

Analysts called it a victory of economy over politics as it sent positive signals to stakeholders in the Indian economy that the government was shaking-off its paralytic mode.

Divestment of PSUs

The sudden burst of energy in the Finance Ministry also witnessed the government taking its first step forward in divestment of public sector undertakings with offloading stake in Hindustan Copper and thereafter in NMDC, but together these could fetch only around Rs 7,000 crore to the exchequer and the budgetary target of garnering Rs 30,000 crore this fiscal through the divestment process looks far-fetched.

But, any positive movement on diesel price and PSU divestment is expected to ease the government’s burgeoning fiscal deficit, which ballooned to Rs 3.53 lakh crore between April and October or nearly 86 per cent of the full fiscal target.

The foreign entry in multi-brand retail, which already saw Sensex surge to its 19-month high late November, is also expected to send positive signals to overseas investors and help attract foreign inflows, which in turn, could balance the current account deficit.

Another long-awaited reform that got Parliament’s nod was banking bill. This is considered as a major step in moving towards financial inclusion that seeks to eventually integrate India’s vast rural economy with the mainstream one.

But, the lacklustre spectrum sale, through which the government could mop up less than Rs 10,000 crore, still remains a concern. Coupled with that, is the widespread concern about the lack of movement in project clearances across the spectrum of the economy.

To fix this up, the government has also cleared the proposal for setting up the Cabinet Committee on Divestment. This is expected to fasttrack projects worth over Rs 2 lakh crore in the road, power, coal and mining sectors that have been languishing under regulatory hurdles, such as delayed land acquisition and environmental clearances.

Despite all attempts by the government to bring the economy back on track, the Mid-Year Economic Analysis lowered the overall economic growth from the budgeted 7.6 per cent to a sub-six per cent for the current fiscal, ending March 31.

Analysts have called upon the government to address some deep-rooted problems ailing the economy such as supply-side constraints through more structural reforms. Besides these, domestic and external investors are waiting for some concrete action on spate of policy announcements in recent months. It remains to be seen if the government, bound by political compulsions in the wake of 2014 General Elections knocking at its door, takes some tough steps towards implementing some of the most urgent policies and the reforms juggernaut continues in 2013.  

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