It’s a new year yet again. A special one, the first year of what most believe is India’s decade (a numerologist friend auspiciously alludes to its start as 1-1-11). It is, by all counts, like the upcoming cricket World Cup, to be played in familiar sub-continental conditions and represented by an above-par national team, something for India to lose.
With so many things stacked in its favour, a lot depends on how well the country can start this decade and, hence, the singular importance of 2011. Capital Calculus argues that there are five bellwethers, both domestic and global, that would help ascertain whether India stays the course to realize the potential the rest of the world sees for it. A lot would depend on how the country’s policy managers react to circumstances, some of which require biting the bullet; so far they have hardly inspired confidence on that count.
First off, there are the international crude oil prices. They are on the upswing again. In the first 11 months of 2010 ended November, the average price of international crude was about $10 higher at around $80 per barrel. Either it is a case of commodity price speculation, or a first warning that the global economy—or at least some segments—may be taking baby steps towards a recovery and, thereby, pushing up demand. It would be safe to assume that if this trend holds, the base price would move up to $100 per barrel and unleash attendant consequences.
Second, leading on from above, is inflation. The uptrend in international crude oil prices come at a time when wholesale price inflation is hovering dangerously close to double-digit levels even as food inflation stubbornly stays in two digits even after two years.
Any attempt to pass through the increase in oil prices to consumers would only provide a fresh fillip to inflationary pressures. Not only will it further alienate the public in a year in which the key states of West Bengal, Kerala and Tamil Nadu are due to go to polls, but will also put pressure on the Reserve Bank of India (RBI) to tighten monetary policy with another round of interest rate hikes, which will only dampen fresh investment and push the growth trajectory lower. Alternatively, any effort to absorb the price increase would distort the fiscal arithmetic of the Union government and the balance sheets of state-owned oil companies, some of which are lining up to raise money from the capital markets.
A logical third factor flowing from the above is the management of the fiscal deficit, or gross borrowings, of the government. The deficit has been rising at a very unhealthy pace. While the finance minister will achieve this fiscal’s target of limiting the deficit to 5.5% of gross domestic product, a blueprint to tackle the structural nature of the malaise is yet to be laid out. On the revenue side, with movement towards a single goods and services tax (GST) and the Direct Tax Code (DTC) virtually comatose, there is only so much the finance minister can do. So the next Union budget should focus on a credible expenditure management strategy that will also hold out a solution to draw down the government’s accumulated debt burden.
A fourth, but equally important, variable is the external sector. For the last two years, the country’s trade deficit and, more significantly, the current account deficit on the balance of payments has been on the rise and was 4.08% of GDP at the end of the second quarter (July to September).
It is at an uncomfortable level and signals from RBI would be critical in fathoming these concerns. The inter-linked issue of sustainability of foreign institutional investor (FII) inflows, a key factor underlying the heady highs managed by the Indian stock market, would be watched. So far it has held up, but with no guarantees for the future, especially if the news about a nascent recovery in the US is borne out.
Finally, the domestic polity, or rather how the Congress manages itself and leads the United Progressive Alliance (UPA), would be crucial in setting the stage for a forward movement on policy change. Alongside, it will continue to be tested by domestic and external terror threats.
The party has frittered away most of the social capital it had garnered after its win by an unexpected margin in the 15th general election in April-May 2009. It has dropped the ball on the GST and DTC. Last year was forgettable as alleged scams roiled the image of the party as well as the UPA even as it mismanaged inflation.
That the scams eventually led to a logjam in Parliament should not have surprised anyone; politically, the otherwise inept opposition could not have wished for more. To be politically besmirched thus ahead of three crucial elections to state assemblies hardly augurs well for the Congress just as the enforced policy paralysis denies crucial economic reforms to seize an unprecedented opportunity for the country.
In net, therefore, 2011 holds as much opportunity, as it does challenges. The big question is whether at the same time next year we will be looking at a cup which is half empty or three quarters full.
To read all of Anil Padmanabhan’s earlier columns, go to www.livemint.com/capitalcalculus
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at firstname.lastname@example.org