The next year will be a time of reckoning for the Indian economy. The government has at best 18 months to act, before election fever rises in anticipation of the 2014 national ballot.
Economists predict that the next year will also be a tough one, though economic activity will get a boost from lower interest rates. A cheaper rupee will help stimulate exports. The bigger challenges will be about the medium term because another two years of policy inaction could lock India into the current rates of growth and inflation.
The most pressing task for the government will be to get the investment cycle whirring again. Higher public investment seems unlikely, given the tight fiscal corner this government finds itself in because of the uncontrolled revenue spending that has fed the inflation beast. But many public sector companies have excess cash to deploy. Using it for new capacity rather than to cover the budgetary gap will make more sense in the larger scheme of things.
Private investment activity has been held back by nervousness in corporate boardrooms. The biggest Indian companies are sitting on a pile of cash that they don’t want to use to build fresh capacity. Animal spirits have been hurt by the recent policy paralysis. The obvious way to rebuild corporate confidence is to have at least a modest reforms agenda.
The Atal Bihari Vajpayee government had taken a lot of tough decisions in its last two years in power. Even if that is politically impossible, the government would do well to focus on some reform initiatives that are already on the table: the direct tax code, the goods and services tax, and licences to new banks, for instance.
There are also a few sectors that have a significant multiplier effect in the rest of the economy that could be given special attention, such as construction of new roads. A reinvigorated national highway programme will generate jobs as well as demand for cement, steel and engineering equipment.
Energy is another area crying out for attention. It will also be politically less controversial than getting foreign direct investment in retail.
The fiscal deficit is the elephant in the room. It seems highly unlikely that there will be significant progress towards fiscal discipline right now. There are already fears that the United Progressive Alliance will try an encore of the 2008 farm loans waiver, an election gambit that paid off. But work should start on a new fiscal pact that ties governments to a hard deficit rule, as the Fiscal Responsibility and Budget Management Act of 2003 did.
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