As the Kelkar panel has pointed out, it is important to always keep in mind that the country is facing the possibility of running into a serious economic crisis. (As the Kelkar panel has pointed out, it is important to always keep in mind that the country is facing the possibility of running into a serious economic crisis.)
As the Kelkar panel has pointed out, it is important to always keep in mind that the country is facing the possibility of running into a serious economic crisis.
(As the Kelkar panel has pointed out, it is important to always keep in mind that the country is facing the possibility of running into a serious economic crisis.)

Capital Calculus | The importance of the Kelkar panel

The panel has bluntly pointed out the looming crisis and laid down a plan to retrieve the situation

A little over a fortnight ago, finance minister P. Chidambaram sounded a grim warning on the economy at the internal meeting of the Planning Commission. Since the meeting was chaired by Prime Minister Manmohan Singh and was called to finalize the draft of the 12th Five-Year Plan, Chidambaram’s intervention was more than just routine.

Quoting parts of the recently submitted Kelkar panel report on fiscal consolidation, Chidambaram unambiguously made it clear that the “do-nothing" option did not exist. If immediate initiatives were not taken and a more realistic assessment of the economy (read growth rates, which till then were blissfully assumed to average 9% for the next five years) not undertaken, the country was surely going to plunge into a fresh economic crisis. Whether he prevailed, or not, or whether the Congress party bought into the logic of its new finance minister, we would never know. But, we do know that the Congress-led United Progressive Alliance (UPA) has suddenly gone hyperactive—still more vocal than actual policy change; but a radical (and welcome) makeover from the previous three year dead-man walking routine.

The importance of the Kelkar panel is two-fold. One, it has very bluntly made the point (which a lot of people outside government have been saying for a long time) that the country is a whisker away from a crisis and the root of the problem is rising government debt burden or fiscal deficit. It was important for someone to tell the truth as they see it; ideally, this should have come from the prime minister’s economic advisory council, or from the department of economic affairs in the ministry of finance (it’s another story that both have been remiss).

The second is that the Kelkar panel was to lay down a fiscal consolidation plan to retrieve the situation. It did; but this is where the government is having a blow-hot, blow-cold relationship with the panel’s recommendations. Understandable, as it requires more than just biting the bullet; the blueprint for action has been proffered as a palliative to the structural problems facing the Indian economy.

Ideally, the two messages had to be taken together; after all, once you know the truth of your ailment, the recommended medication is a logical corollary. However, what has happened since the Kelkar panel report was made public is the runaway spurt in the Sensex—piercing the 19,000 points psychological barrier. Consequently, a feeling is gaining ground that the finance minister has armed himself with a magic wand, the worst is behind, and the economy will bounce back like it has done on so many occasions in the past.

It is akin to persistently high temperature associated with a serious body ailment. Symptomatic medication can reduce the fever; but to resolve the body ailment, one will have to go through the routine of antibiotics—no matter how bitter and body sapping they may be. Abandoning medication at the stage when the fever leaves the body would be disastrous; the disease will most certainly return with greater vengeance and, obviously, be more devastating.

As the Kelkar panel rightly pointed out, it is important to always keep in mind that the country is facing the possibility of running into a serious economic crisis. The political economy of this crisis is that this is self-ordained—inaction for most of the last eight years. That is both good news and bad news. The bad news is that it could have been avoided, and the good news is that the situation can be retrieved by policy action.

But what makes this near-crisis situation different is that it is taking place in extremely alarming circumstances. First is the fact that the external situation is vastly different from what prevailed during a similar crisis in 1991. The external sector is extremely hostile today than what it was 21 years ago. Further, the Indian economy is substantially much bigger at $1.8 trillion; consequently, the stakeholders in the growth process are far more than in 1991, and the suffering, therefore, would be much more this time than ever.

This leads us to the second and more worrying problem of jobs. The economy is far from being able to absorb the estimated 12 million being added to the workforce every year. The empirical evidence so far suggests that it has been a case of jobless growth—unprecedented surge in economic growth rates accompanied by little or no job creation. The onset of a crisis would only turn this situation into a nightmare. The possibility of social chaos is for real.

In the final analysis, it is important, as the Kelkar panel concluded, not to lose sight of the economic problem at hand. More importantly, the UPA should avoid short cuts as newspaper headlines, influenced by the surge in the Sensex and spin doctors, and start getting friendlier. It is its best chance to redeem itself.

Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com

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