New government and the economy's counter-ripple effect

With the growth momentum getting a severe jolt, the government will have to devise necessary policy initiatives to spur the cycle of demand across to save as well as create new jobs.

The country's economy is now widely expected to record a lower growth rate ranging between six and 6.5 per cent in 2008-09 compared to nine per cent in the previous three financial years. The Reserve Bank of India has already forecast six per cent growth in the current fiscal year.

Since the major component in the dose to boost growth would depend on public spending, the government will face the immediate challenge of allocating massive resources to fund capital expenditure to spur the much desired demand in the economy.

Given the current economic scenario, the government will be compelled to pursue with the ongoing stimulus packages, which were unveiled by the Congress-led UPA government, with primary focus on public spending.

At the same time, the government, while focusing on stepping up public spending, will have to minimise government expenditure. The combined fiscal deficit, the net difference between the government's net income and expenditure, of both Centre and states is apprehended to reach an alarming level of the Gross Domestic Product (GDP) during 2008-09, the fiscal just ended on March 31. The fiscal deficit has ballooned primarily because of two reasons.

First, the implementation of the Sixth Pay Commission's recommendations, Rs 72,000 crore farm loan waiver and the UPA's flagship popular schemes like creating jobs under the National Rural Employment Guarantee have added to the Central government expenditures and liabilities.

Second, massive government spending under various stimulus packages are further inflating the fiscal deficit. Given the growing apprehension of tax revenue growth is likely to remain subdued for the most of the current fiscal — 2009-10. And most of the other expenditures like subsidy burden and spending under stimulus packages will remain high.

Therefore, the government would face the urgent need to bring government finances back on the track of fiscal consolidation once there is an improvement in economic conditions and before the exceptional ways in present times grow into a habit and create a fiscal crisis in the medium term.
Given the peculiar economic scenario in the backdrop of the ongoing global recession and economic slowdown, other major challenges facing the new government would be: how to pursue the much-needed economic reforms in a wide range of economic fields. Pursuance of reforms is vital to put the economy on a trajectory of higher growth.

New hope

Inspired by the prospect of a stable government at the Centre, with the Congress-led UPA getting a clear mandate, the India Inc is quite hopeful that the new government would push forward growth-oriented reforms to put the economy on a higher trajectory of growth.

With the UPA no more being hamstrung by the Left parties, the Indian Inc and industry overwhelmingly felt that the new government would no more be under constraint to go ahead with reforms in key segments like banking, insurance and pensions.

But given the ripple effect of global financial crisis that has led to widespread apprehensions of job losses, the government is likely to adopt a new approach while pursuing radical reforms in the financial sector.

Other major tasks facing the government will be how to make available sufficient funds to trade and industry.

The distinct prospect of stability at the Centre UPA getting a clear mandate will, no doubt, make the job easier for the new government to revitalise capital market and boost investors’ confidence in the stock market. In fact, on the very first day of trading after the UPA getting a clear verdict, the Sensex surged 17.3 per cent — triggering circuit breakers that shut the market early — as investors welcomed the ruling coalition's victory.

Analysts say stability in the equities market would depend on continuation of reforms and revival in industrial growth, which the government is widely expected to give top priority.

Other key tasks facing the government relates to policy framework for taxation. Tax reforms would be key for the government for shoring up revenue collection. At the same time, tax reforms will have to focus on boosting consumption and growth. This will call for moderate tax rates and enhanced tax compliance.

The government will have to attend to the delicate issue of further relaxation of Foreign Direct Investment (FDI) regime in various sectors. It is to be seen how it handles politically sensitive issue of opening up FDI in retail.

Another matter of interest is to see how the new government handles the sensitive matter of unearthing black money stashed away in tax havens abroad  — an issue vehemently raised by the BJP during the campaign for the general election.