Manmohan Singh long ago frittered away his reputation as the architect of India’s economic reforms. In the last few years, he has instead been known for a lack of leadership, paralysis in government decision-making and for the dubious distinction of presiding over an economy that has seen the lowest growth rate in the past nine years. The question is: will he be able to change things now that he is the finance minister?
He has started off on the right note, by directing his economic advisers and the bureaucrats in the finance ministry to devise ways to “reverse the climate of pessimism”. But everybody knows what needs to be done. Economists, the government’s own economic advisers and the Reserve Bank of India have all warned of the dire consequences of fiscal profligacy. It’s not as if Pranab Mukherjee was dead set against reforms either. Whenever he was asked about the lack of reforms, he pinned the blame on the exigencies of coalition politics. There lies the rub: in the prevailing climate of rampant populism, will the government be able to take hard decisions? Will it be able to play off the wily Mulayam Singh against Mamata Banerjee? Most importantly, will Singh, even with the best of intentions, be able to prevail against the populists in his own party? In short, the problem is political. On issues such as the land acquisition Bill, hiking the foreign investment limit for insurance, and foreign direct investment in the retail sector, there is little the finance ministry can do.
But the Prime Minister is right in identifying the balance of payments (BoP) as the crux of the problem. We have a wide current account deficit that needs to be financed, and it is important for us to attract foreign capital. Abandoning the uncalled-for retrospective tax grab would be a first step. At bottom, the BoP problem is due to the fact that savings have declined more than investment. The remedy would be to increase government savings by reducing subsidies. At the same time, inflation can be tamed by switching government expenditure from consumption to investment. If the finance ministry is indeed serious about tackling the root cause of the BoP issue, there is no alternative to pruning subsidies to reduce the fiscal deficit. Also, a fresh effort is needed to get the opposition on board for the goods and services tax. And the government needs to announce time-bound deadlines for completion of a score of high-profile projects, such as the dedicated freight corridors, with monthly updates on their progress. These steps should be enough to improve sentiment.
Will the Prime Minister, after all these years, be able to change course? If he wants to salvage his reputation, he has no alternative.
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