It is almost certain that the economy will not manage to expand by the projected 9% this fiscal. What is not clear is whether growth will drop to 7% or settle somewhere higher, maybe even top 8%.
A lot actually depends on how quickly the Congress-led United Progressive Alliance (UPA) moves to implement long-pending policy reforms and on the monsoon sticking on the course as predicted by the India Meteorological Department. Neither can be taken for granted.
The vagaries of weather, especially given the extreme fluctuations seen in the past few years, can never be anticipated entirely, but the same cannot be said about governance—something entirely within the control of the government of the day.
Niranjan Rajadhyaksha’s column | The exuberance was ill-timed
Still, it is no secret that decision making in the government has come to a virtual standstill. Much of this is due to its leaders’ lack of certitude. Missteps in dealing with varied disruptions—the response to the civil society movement against corruption led by activist Anna Hazare is a case in point—have at once made the government both defensive and belligerent. This is unfortunate; the current circumstances require a proactive government which is willing to reach across the political divide to achieve a consensus. This is required because there is no quick fix for the problems at hand, many of which are mostly structural in nature.
The government’s inability to manage inflation has shown that piecemeal measures are no longer effective; unlike in the past, the Indian economy is no longer insular and is very integrated into the global economy. One structural response to the problem would be to curb the Union government’s fiscal slippage, but this requires a sustained commitment.
The coming monsoon session of Parliament was meant to be one that saw a lot of activity on the policy front. The duration of the budget session was cut to allow political parties to campaign for elections to five state assemblies. As a result, a lot of pending Bills, some of which could accelerate financial sector reforms (such as the Insurance Laws (Amendment) Bill, Pension Fund Regulatory and Development Authority Bill and Banking Laws (Amendment) Bill), were to be taken up in this session. Given the polarization of political opinion, it is unlikely that will happen. The coming session of Parliament will likely be a tumultuous one —in fact, it could be a replay of the winter session where the political logjam prevented any business from being conducted. If this happens, it will further dent investor perception and business confidence.
The onus clearly is on the UPA. Every crisis, as the cliche goes, is also an opportunity. The buzz in New Delhi’s government circles is that the impending shuffle of the cabinet will not only see a serious clean-up, but also result in the induction of younger politicians in key positions. If this happens, it will be a welcome change and be consistent with the demography of the country where nearly 60% of the population is less than 35 years of age.
While that will help, it is unlikely to change how investors see this government (answer: poorly). Perceptions, though, are easily changed and a few key policy decisions may do the trick. One such would be some visible and real progress on the single goods and services tax.
After a great start, the UPA completely lost the momentum on pushing ahead with the tax that promised to create a unified market. The process has now become hostage to political gamesmanship. Moving forward on the tax would help, not just by creating this unified market, but more by sending out the message that the government has the conviction to act on what it has promised. This was aptly summed up by former Reserve Bank of India governor Bimal Jalan in an interview published in Mint on Tuesday, when he said: “On economic reforms, it is of utmost importance to deliver what you say I will...on the public delivery side, food delivery to the poor, the working of the rural employment scheme, construction of power stations, or delivery of power. If you say you want to do this, you have to do this. If you succeed, then people will start feeling that, ‘Yes, the government means what it says’.”
Next: Manas Chakravarty on markets.