Since taking over as finance minister, P. Chidambaram has successfully turned around the capital markets as a step towards macroeconomic stabilization. Rupee expectations have reversed from Rs.56 to the dollar two months ago to Rs.52 now, foreign investors are enthused by the expected appreciation, the oil import bill is contained and the external position stabilized somewhat. After this pumping, the government is now positioned as a strategic seller: an immediate, overriding goal is to repair the fisc through share sales. The list is long, involves continuous divestments and there’s urgency to extract a good price for the assets and redeem the public balance sheet that’s at the heart of the crisis-racked Indian growth story. Buoyant capital markets are critical for all this.
For the strategy’s success, though, simply love and fresh air won’t do. The Kelkar Committee, set up to outline a path for fiscal consolidation, suggests compression of spending by pruning subsidies and plan expenditure; and it recommends revenue-boosting measures like monetization of public assets ranging from surplus land to outright stake sales and better tax collections. Since the report was made public, the finance minister has cleared the air on subsidies with reference to socio-economic objectives, promising better targeting instead. The preferred option is revenue mobilization from streamlining tax compliance and auctions, land and asset sales, among others. Such preferences imply even more need for robust markets. Hence, there isn’t a doubt that markets will be kept moving until a successful divestment outcome breaks the fisc-market feedback. How will the government sustain the momentum?
The finance minister offered a preview in a recent interview, when he opined that the “government and monetary authority must point…and walk in the same direction. As we take steps on the fiscal side, the RBI (Reserve Bank of India) should take steps on the monetary side.” Since RBI meets to decide the course of its policy rate on 30 October, this is a clear direction to its choice then, notwithstanding that September inflation figures are yet to be known. The question, however, is which fiscal steps is the central bank expected to match? Wasn’t the CRR (cash reserve ratio) cut of 17 September against a backdrop of rather small liquidity deficit a complement to the preceding fuel price adjustment and LPG reform? There has been no fiscal action since. But there is now clarity that disinvestment will be the critical variable to the exercise. Back to the markets that are especially fond of lower interest rates. And bossing over the central bank.
Like the Greenspan-Bernanke puts of lowering interest rates to protect investors’ downside and keep stock prices boosted, this one is aimed at propping equity markets and retaining investors, too. The similarity ends there, though. This is not the Indian central bank talking of lower interest rates to maintain investor wealth distributed more favourably through stockholdings across the US, but an indebted government seeking to mobilize resources by selling the family silver! RBI should not collaborate in this, but reserve its judgement.
Renu Kohli is a New Delhi-based macroeconomist; she is a former staff member of the International Monetary Fund and the Reserve Bank of India.