Economy, a daunting task for UPA

New government: Reversing the slowdown in growth will be top priority

Against the backdrop of Indian economy reeling under the ripple effect of global slowdown, the newly formed Congress – led UPA government faces the immediate task of pulling out the economy from quagmire of slowdown and putting it back on a trajectory of high growth. Or else a prolonged contraction in demand would lead to serious problem of job losses, which in turn would ignite social tension.

The Prime Minister Manmohan Singh while outlining the priority of his government on Friday has indicated the effort to bring the economy back on track of higher growth with focus on inclusive growth would receive top attention of the government.

The ripple effect of slowdown is virtually reflected in key economic indicators like Index of Industrial Production and export growth rate, which have been witnessing declines in growth rate since October last year as a result of the global recession. Thus our economy may grow only at around 6 per cent in 2009-10 compared to 9 per cent growth rate two years ago.

Push for growth

Most economists say the new government will have to adopt both short-term and long-term measures to arrest the ongoing slowdown and boost economic growth. Planning Commission member Dr Abhijit Sen said, “Under the short-term measures the government will be expected to carry forward the stimulus packages unveiled by the previous regime from October last year onwards to spur demand in the economy.”

In fact the Prime Minister had indicated earlier that his government may come out with a new stimulus package within 100 days. The three stimulus packages unveiled by the previous regime had focused on spurring demand in those sectors worst hit by the global recession like auto, housing, textile and export-oriented manufacturing activities.   

But as an immediate short-term measure to kick-start growth momentum the government will have to attend to the urgent need of making funds available to cash-starved trade and industry to meet their investment and business expansion requirement. As noted economist D H Pai Panandiker, who is heading RPG Research Foundation, says “The government must urgently ensure availability of fund to trade and industry at a reasonable rate. The RBI should further relax key rates to bring down the overall lending rates at least by two per cent.”

According to Finance Secretary Ashok Chawla, “We are very clear that the economic environment clearly points towards southward movement of the lending rates. Banks are aware of that and we expect them to move in that direction.”

Support export

The other immediate task facing the new government is how to arrest the declining trend in export, which has been the worst hit by the ongoing global recession.  The contraction of demand for consumer goods in the major economies like that of U S and EU countries, which are India’s major export markets, has affected country’s export so severely that several export-oriented manufacturing units in sectors like textile, leather and gems and jewellery are closing their shops leading to job losses.

As the President, Federation of Indian Export Organisation (FIEO), A Sakthivel says, “Promotion of export must get the top priority of the government. It is important for boosting economic growth as well as saving jobs.”  The exporters are hopeful that as part of strategy to boost export the new government may increase duty refund against taxes paid on inputs for production of export items.

To boost growth through public spending, the new government will face the immediate challenge of allocating massive resources to fund capital  expenditure. But analysts say the real challenge facing the new government is how to formulate long-term measures to bring about growth-oriented structural changes in various segments of the economy to put it on high trajectory of growth.

But at the same time the new government will face the accompanying challenge of sticking to the course of fiscal consolidation, which calls for minimising the 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 the alarming level of 10 per cent of the Gross Domestic Product (GDP) during 2008-09. Given the growing apprehension of tax revenue growth likely to remain subdued for the most of the current fiscal—2009-10—and most of the other expenditure items like subsidy burden and spending under stimulus packages remaining high, the fiscal deficit will remain high.

Formulation of tax policy

The other major task facing the new government relates to formulation of taxation policy. On one hand it would have to focus on boosting revenue collection, which is vital for meeting government’s growing unavoidable expenditure and reducing the overall fiscal deficit.

At the same time it should spur consumption and growth. This will call for moderate tax rate. As the tax consultancy firm Ernest and Young suggests, the new government will need to reduce corporate and personal income tax rates to give a major boost to the ailing economy and keep it moving at a decent pace.  The other major economic agenda that needs urgent attention of the new government relates to that of pushing forward economic reforms. With the Congress-led UPA coalition getting clear mandate, India Inc is bubbling with hope that it would speed up reforms and spur the economy through policies as the Left Parties are not there to block them. Some Economists also feel that with the new government no more being hamstrung by the Left Parties, it would no more under constraint to go ahead with reform in key segments of the economy.
Suresh Tendulkar, who headed Prime Minister’s Economic Advisory Council, says “Economic reforms would certainly be on top of the agenda of the government.” Chief Economic Adviser Arvind Virmani also feels for returning to nine per cent economic growth “we need to come out with additional fiscal reform measures.”

Measures for key segments

In fact, to put the economy on higher trajectory of growth a slew of reform measures are needed in key segments of the economy like banking, insurance, pension and restructuring of public sector undertakings, telecommunication and retail. However, there are indications that contrary to widespread expectation of the Indian Inc and industry, the new Congress-led UPA coalition government is unlikely to push forward economic reforms “aggressively”.

 The new government is likely to adopt a “cautious” approach while chalking out the road map for reform programmes in view of ongoing global recession and “political” sensitivity over the issue.

The outgoing Commerce Minister Kamal Nath has already gone on record saying “We will have to be cautious about financial sector reforms. Some of the icons of the financial world who were advocating financial reforms have closed shop.”

But it is expected that the new government would go ahead with reform programmes in insurance sector by hiking Foreign Direct Investment from the existing cap of 26 per cent to 49 per cent. Economy is more or less prepared for it as this reform measure has been pending for a long time.

As far as reform measure in the sensitive pension sector is concerned, the government is likely to adopt a cautious approach to allow foreign players to manage massive pension funds in view of bitter experience arising out of global financial meltdown. While the government is likely to liberalise the FDI regime in wide spectrum of the economy to woo much needed foreign fund especially in key infrastructural sectors, it will adopt a cautious approach on allowing FDI in the sensitive retail sector, which comprises millions of small mum and pop stores.