One of the first tasks of the new Manmohan Singh government will be to repair the damage done to the Indian economy over the past year.
Niranjan Rajadhyaksha, Managing Editor
The outgoing government headed by him had thrown fiscal caution to the winds in an attempt to prevent a complete collapse in economic growth. The consolidated fiscal deficit of the Union and state governments is now at levels not seen since the economic crisis of 1991. A further fiscal push could tip India into another 1991-style crisis. Global credit rating agencies have already warned that India’s foreign debt could get junk status if the fiscal deficit continues to deteriorate.
That itself is an onerous task. But the Indian economy may be facing deeper problems that cannot be tackled by short-term demand management and lower interest rates. The latest release of the survey of 17 professional forecasters by the Reserve Bank of India frames the problem in stark terms. These economists expect India’s economy to grow at an average rate of 7.5% over the next 10 years, if one goes by the median forecast. An earlier poll done by the central bank said that these forecasters were expecting a 10-year growth rate of 8.8%.
Now, why is this important? It is accepted by just about every serious economist that the Indian economy will need to grow at 9-10% a year over the next decade if there is to be a serious attack on poverty and unemployment. Singh himself has often made a similar point in various speeches.
Slower growth—through lower tax collections—will also restrict the ability of the Indian state to fund the social security programmes that are needed to help the poor and those who will be undoubtedly hit by business cycle convulsions.
What India now needs is a new reforms push to keep growth near recent highs. Singh should know from his own experience as finance minister and Prime Minister that the best time to strike is either when there is a colossal economic crisis that paralyses interest groups or when there is a strong political tailwind to help you forward. The election results provide the latter, at least for now. Thus, the first 100 days will be crucial.
There are many action points; here are a few obvious ones: a quick movement to a national goods and services tax that will finally give us a truly common Indian market more than six decades after Independence; a viable plan to rebuild our grossly inadequate and tattered physical infrastructure; labour market reforms so that businesses have an incentive to offer jobs to a growing labour force; a huge push to reform education (perhaps the last bastion of the licence raj) so that there is a supply of skilled workers; an exit policy to ensure that capital is not frozen in dead enterprises; tough decisions on non-merit subsidies on fuel and fertilizer that help the middle class and rich farmers; and steps to increase financial depth so that more Indians have access to modern finance and risk management.
Previous government and countless committees have already laid most of the groundwork. All that is needed, is action. Without having to look over his shoulder every now and then, Singh should opt for the sort of blitzkrieg that he adopted in 1991-93, before the Congress old guard regrouped and blocked further advance.
And he and his finance minister will need to pay attention to the elephant in the room—the huge fiscal deficit. Investors will expect a credible plan to set India back on the track to budgetary sanity.
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