Too soon to party
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Opening up multibrand retail to foreign direct investment at the cost of losing an important political ally, hiking diesel prices, though marginally, and capping the number of subsidised gas cylinders are decisions only strong governments take. Normally, even these are calibrated and introduced when the euphoria of an electoral victory is still to fade. But just when everybody had lost hope, Prime Minister Manmohan Singh demonstrated an unusually strong political will to act. These bold measures, along with others to smoothen capital market flows, have brought tens of thousands of crores back into equities since August. More significantly, they lifted the Damocles' sword of a ratings downgrade. But the government still has to do much more.
By the time the meeting was over, the discussion veered into actions that are still in the realm of the possible and can keep the party alive. Certainly, the decisions of the last two months have triggered higher expectation levels among investors. But not many are encouraged enough to invest yet. The rupee, which had strengthened to 51 to the dollar, is tottering back to 54. The Bombay Stock Exchange's 30-scrip benchmark index Sensex, which had scaled the 19,000 peak, has lost over 2 per cent since its 15-month high a fortnight back. Investors are asking, what more? The government cannot pull out a rabbit from its hat every day, but it should definitely demonstrate its resolve to address a few critical issues that could turn the tide.
First and foremost is reining in the fisc, the toughest task politically. You can hate credit ratings agencies, but the bitter reality is that their actions impact fund-raising by corporate India. And the only number that matters to the ratings agencies is the country's fiscal deficit as a percentage of the GDP. At both the Central and the state level, deficits are bursting at the seams. The marginal diesel price hike will reduce the fiscal deficit by just about 0.1 per cent of the GDP. The government's expenditure programme is bloated and there is an urgent need to pare it down. The new finance minister, P. Chidambaram, has an unenviable job. True, the employment guarantee scheme has meant a lot to rural India and increased income levels, but the payout cannot keep rising. The finance minister must consider indexing NREGA wages to inflation, hiking urea prices and expediting Aadhar-linked payment of subsidies to plug leakages.
While controlling the deficit is and will remain a work in progress, the prime minister must set up the National Investment Board. He must curtail his ministers' instincts to preserve their turfs. A single-window clearance, in letter and spirit, will infuse life into projects that have been stuck for want of various approvals. Every project file has to be stamped by 17 Central government agencies before a company can actually start work. Having enthused the investor community with a series of measures, the government cannot afford to lose an opportunity to build on the momentum. Today, few believe the investment scenario projected by the government. The finance ministry has estimated that about Rs 2.5 lakh crore in infrastructure investments is in the pipeline, and claims funding for the bulk of these projects has been secured. Pushing up the investment rate from 33 per cent of the GDP to 38 per cent will require the government to do more than just painting rosy pictures. It has to convince the industry with credible action. Clearly, investment is critical if the economy is to aim for growth rates of more than 8 per cent. The wage/price spiral, and consequent consumption-led growth, needs to be replaced by an investment-led growth cycle. This, and only this, will create jobs and make higher growth rates politically meaningful. The investment board must be accompanied by a transparent and practical law on land acquisition. The group of ministers has cleared the contentious bill and the rest depends on the government's floor management.
The last reform, whose virtues need not be elaborated on, is the goods and services tax (GST), which can give the economy the heft it requires at a time when the whole world is slowing down. Foreign and domestic investors understand it is more politics than economic rationale that is holding back GST implementation. Corporate India's belief is that the BJP, the principal opposition party, is interested in delaying it, but not beyond 2013. But it's still not too late. Chidambaram is said to be meeting Bihar Finance Minister Sushil Kumar Modi this week, before the empowered committee of state finance ministers meets early next month. Maybe he will get the states on board just before the budget. That would be no mean achievement.
"The candle burns the brightest before it goes out," said a senior government manager of the recent revival in the government's animal instincts. But then, what is there to lose? Nobody wants an election till 2014.
The writer is editor, Mumbai, email@example.com
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