The year’s closure often invites reflection. On this count, 2012 is a classic tale of two sets of policies. The first half of the year possibly qualifies for best prize in policy goof-ups, while the second part was devoted to undoing the damage.
The year opened with alarming macroeconomic imbalances: at least a one point slippage in the fiscal deficit, budgeted at 4.6% of gross domestic product (GDP); spending excesses spilling onto the current account balance—4.5% of GDP; a 7.7% rate of inflation; GDP growth at 5.3%, a 13-quarter low; and a 17% currency depreciation in about four months.
All this never figured in the policymakers’ mindset though. A blast of fiscal decisions barged into this backdrop, guaranteed to erode investor confidence, already weakened by the deteriorating economic position. A proposal to introduce GAAR (general anti-avoidance rules) from April 2012 was announced, sending shockwaves across the investor community as it bestowed vast powers to revenue authorities for deciding on tax transactions. Then followed the retrospective tax amendment proposal to assert the exchequer’s right to levy tax on merger and acquisition deals involving overseas companies with business assets in India, chiefly to overcome the court verdict in Vodafone’s favour. The budget 2012-13—awaited keenly for its efforts at fiscal correction—was itself a bloomer: the deficit ballooned to 5.9% of GDP while its assumptions of GDP growth (7.6%), gross tax revenue (19.5%) and a cap on subsidies (2% of GDP) were hugely over-optimistic.
In September, the Kelkar panel assessed underestimation of subsidies at Rs.70,000 crore and overestimation of tax receipts at Rs.60,000 crore. Growth forecasts have since been scaled down to a range of 5.7-5.9%.
This points to the more sober half of 2012, singularly devoted towards damage control. A new finance minister was in itself a step to restore credibility, followed by an entirely new team at the helm of economic affairs. Bringing markets back to life was one of the first tasks: the new FM quickly appointed an expert panel to draw a road map for fiscal consolidation; and another one to examine retrospective tax amendments and GAAR proposals. Favourable market responses were then bolstered by several policy changes to boost foreign capital inflows, restrain fuel subsidies and shift to cash transfers; increase non-tax revenues via disinvestment; efforts to revive the investment cycle; restructuring of power utilities; clearing some of the legislative backlog and so on.
The year ends with still-weak macro indicators: the fiscal deficit may yet overshoot the projected 5.1%; the current account deficit stood at 3.9% of GDP in September, but may cross 4% of GDP in the last quarter; inflation is at 7.2%; and GDP grew 5.3% in the third quarter. However, the rupee has recovered somewhat. And the good thing is that economic policies are now on the right track.
Renu Kohli is a New Delhi-based macroeconomist; she is currently lead economist, DEA-Icrier G20 research programme and a former staff member of the International Monetary Fund and the Reserve Bank of India.