Indian govt faces fiscal, economic challenges

The left-of-centre government faces a widening deficit, slowing growth, falling exports and factory output and huge expectations for fresh stimulus to protect growth and jobs.

“They have to look into new sources of revenue, including disinvestment of state-run firms," said Suresh Tendulkar, chairman of the Prime Minister’s Economic Advisory Council.

“This is an untapped source of revenue which will generate more fiscal space."

An industry lobby group estimates privatizations could fetch nearly $60 billion, which could see the coalition expand the scope and scale of its development plans.

In its previous five-year term, the coalition abandoned privatizations to ensure the support of its former communist allies, but now has the numbers to carry out its plans.

Analysts say the thumping victory of the Congress-led alliance, which left it about 12 seats short of an outright majority from the 543 seats at stake, mean hard decisions could be taken without fear of alienating a coalition partner.

“Without any doubt it is a big positive for both policy and the economy," said Jahangir Aziz, JP Morgan’s chief economist in India.

Nursing growth

Analysts said the overriding challenge was to revive growth, getting it back on track for the 8-9% authorities see as a plausible economic speed limit in the 2010/11 fiscal year.

They advocate scrapping controls on fuel prices to cut subsidy costs, enacting long-stalled plans to increase foreign investment in insurance and pension funds, and bulldozing away barriers holding back road-building and power generation expansion.

Comerce minister Kamal Nath said India needed to be cautious in its approach to financial sector reforms against the backdrop of the global financial crisis.

The global economic slump has hit Asia’s third-largest economy harder than expected, with growth expected to slow to a seven-year low of about 6% in 2009-10 (April/March).

Growth is expected to have slowed to less than 7% in 2008-09 from rates of 9% or more in the previous three fiscal years.

The push by Congress in its first term for inclusive growth, which saw strong economic expansion tempered with pro-poor policies, has raised voters’ expectations.

“The mandate clearly indicates that the rapid growth rates have touched people in different areas of the country and has led to the widespread presence of the Congress party," said Tendulkar.

“Consequently, people would expect the government to pursue a rapid growth strategy."

Deficit

Campaign promises and likely support packages for distressed industries mean increased expenditure that could further widen an already large fiscal deficit, which undermine central bank efforts to keep interest rates low to support growth.

JP Morgan’s Aziz was looking at a fiscal deficit of 8% for 2009-10, way above the government’s estimate of 5.5%.

“So this is going to increase government borrowing and put pressure on interest rates exactly at a time when the private sector credit demand might also revive," said Aziz.

“But the political mandate gives enough options to the government to create fiscal space and prevent a sharp rise in interest rates."

Apart from asset sales, Aziz said bonds could be sold to expatriate Indians, the government could cap its food, fuel and fertilizer subsidies to control costs, and introduce a goods and services tax to widen its revenue base.

An early test of the government’s economic agenda will be its budget, which is expected by late June.

“A lot of hard work lies ahead for the new government. They have less of an excuse for going slow on reforms this time because the Left isn’t there," said V. Anantha Nageswaran, chief investment officer Julius Baer in Singapore. Nageswaran is also a columnist with Mint.

“Their stand on economic policy and reforms can’t be worse this time; it will be the same or slightly better. The only concern is if populism dominates the fiscal and economic policy."

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