The first two stops in his four-city roadshow through Asia and Europe to meet global investors seem to have gone off well for finance minister P. Chidambaram. He has told his audiences that the fiscal deficit will be reduced; the government will move ahead with important economic legislation; tax rates will be stable; and the subsidy regime will be reformed.
The government has tried to allay the fears of foreign investors ever since Pranab Mukherjee moved away from the finance ministry. The reason is not hard to understand. India needs robust foreign capital flows to fund its massive current account deficit, and financial flows are an important source of dollars. The easy monetary conditions around the world since July have also helped the cause. Foreign institutional investors have put nearly $19 billion (around Rs.1 trillion today) into Indian equities since that month.
It is quite likely that the government will keep investors interested with a steady flow of announcements that meet market expectations. A small interest rate cut by the Reserve Bank of India next week—which is what most economists expect—could lift investor spirits even more. That should hopefully ensure that the current account deficit is comfortably funded and there is no run on the rupee.
However, the high current account deficit is just one of the many symptoms of the fact that the current economic slowdown is more structural than cyclical. The United Progressive Alliance government has shown remarkably little enthusiasm for economic reforms since 2004. It was only the severity of the slowdown, the steep decline of the rupee and the threat of a sovereign downgrade in the middle of 2012 that seem to have forced the Congress political leadership to give the economic reformers a chance. That there has been some welcome policy momentum in recent months despite the same balance of power in Parliament suggests that the primary opposition to reforms came from within the Congress party rather than from outside.
One important hint that Chidambaram has dropped in his Hong Kong and Singapore speeches is that political constraints are loosening. “Practical politics in India is getting very reassuring,” he said in his Hong Kong meeting. In Singapore, he told his audience that behind the noise, there were quiet negotiations with the opposition parties on key economic legislation, and support from them.
Chidambaram has perhaps a six-month window before preparations begin for the national election due in 2014. A rapid growth recovery seems unlikely by then. The current calendar year may see a small increase from the recent lows. The global economy continues to be fragile, as the International Monetary Fund has reiterated this week.
Chidambaram has brought a welcome sense of urgency in the finance ministry, but the road to recovery threatens to be a long one.