Nothing much to boast about in terms of achievement, industry feels UPA-II could have done a lot better with the mandate it enjoys.
For a government that had to resort to some tough belt-tightening measures within weeks of re-entering office, the auction of 3G spectrum could not have come at a better time. On the eve of completing a year in office, UPA-II has managed to rake in over Rs 67,000 crore and for the first time in several months, is drawing some comfort on the fiscal front.
But, if the one-time bonanza is providing any comfort, economists say a time bomb is ticking on the fuel price front, with the government yet to free it. While many are drawing comfort from the fact that lower oil prices, following the debt problems in Europe, would reduce the government’s headache, the government needs to decide on it one way or the other.
“In rupee terms, oil prices have not changed much, given that the Indian currency has also depreciated. Weaker global markets also mean lower capital flows and a weaker rupee, resulting in lower benefit of a fall in oil prices. You really have to believe that oil prices have to remain under $75 (a barrel) for the oil subsidy to remain low,” said Jahangir Aziz, JP Morgan’s chief economist in India.
While government officials are putting a brave face on the impact of the European problems on the economy, the Reserve Bank of India (RBI) has sounded a note of caution. Economists say that if global markets remain weak for a sustained period, the government’s disinvestment programme, budgeted to generate Rs 40,000 crore this year, could be affected.
If that were to happen, Finance Minister Pranab Mukherjee and his team will have to get back to the calculator. “While 3G minimises the probability of a fiscal deficit overrun, it does not open up the possibility of a lower-than-5.5-per cent fiscal deficit,” said Aziz.
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Economists are, however, factoring in the possible impact of the crisis. For instance, Citi India economists Rohini Malkani and Anushka Shah, who, like many others, were expecting the RBI to once again increase key policy rates before the next quarterly review, slated for late July, now see a lower probability of the event.
Besides, with most economists saying food prices have peaked, the pressure from inflation would ease at least on that front.
In fact, signs of global recovery, and the subsequent increase in commodity prices, along with high food prices, were a major headache for the UPA in the first year of its second term.
The revival and the improved stock market sentiments, however, helped the government push through sale of its stake in public sector companies through the public offer route. What really helped the government revive the disinvestment programme, and mop up over Rs 25,000 crore through the route in 2009-10, was the absence of the Left parties in UPA-II.
But, it still did not have the political space to push through expenditure reforms. For instance, it has moved to revamp the fertiliser subsidy regime by shifting to a nutrient-based system, but is yet to restructure and reduce fuel, food subsidy.
The Kirit Parikh committee recommendations, calling for complete deregulation of petrol and diesel prices and periodic increases in cooking gas and kerosene prices are yet to be implemented for fear of upsetting the middle-class. The less contentious issue of linking APM gas prices to market levels has been implemented. In case of food subsidy, Congress president Sonia Gandhi’s call for a review of the proposed Food Security Act could make the calculations go awry.
In any case, the finance minister has depended on growth, and the resultant tax buoyancy, to budget for fiscal deficit of 5.5 per cent of gross domestic product (GDP) this year, as against 6.7 per cent in the revised estimates in 2009-10. And, he has chosen not to act on the 13th Finance Commission’s road map to lower the Centre’s fiscal deficit to 3 per cent in 2013-14 and eliminate revenue deficit by then. Similarly, there is no commitment from Mukherjee to cap the Centre and the states’ combined debt at 68 per cent of GDP by 2014-15.
Indeed, the government’s stated objective of reducing its fiscal deficit to 5.5 per cent of GDP in 2010-11, which represents a 120 basis points reduction over the previous year, may prove to be a difficult target if international oil prices go north. For, neither has the finance minister provided for adequate subsidy for the oil sector nor has the government shown any inclination and raise petroleum product prices.
Worse, the government’s fiscal deficit target of 4.8 per cent for 2011-12 will be a tougher challenge, as the one-time benefits of 2010-11 (3G licence auction fee and disinvestment proceeds) will not be there to provide the same cushion to the finance minister’s budgetary numbers.
If the Left had stopped P Chidambaram from implementing key financial sector reform initiatives during the UPA’s first five-year term, a stronger Congress presence in the Lok Sabha has not made Mukherjee any bolder. So, the government is yet to move on providing legislative teeth to the pension regulator or speed up the process of increasing the foreign investment cap in the insurance sector.
Despite a weaker Opposition, the government has not managed to push key legal changes. At the end of the Budget session of Parliament, the number of pending Bills increased to 70 from 49 at the start of the session. The government’s political mismanagement has meant the Bills pertaining to companies law, foreign trade, industrial disputes, insurance, telecom regulatory authority, mines and minerals, drugs and cosmetics, motor vehicles legislation, labour laws, coal mines, trademarks, stock markets’ regulation, foreign educational institutions, chartered accountants, copyright laws and petroleum products transportation will have to wait for a while.
Even inside the UPA, political managers have been unable to sort out issues. For instance, the confusion over whether ICICI Bank and HDFC Bank are Indian or foreign, introduced by UPA-I, is yet to be cleared.
Similarly, Mamata Banerjee’s opposition to the new rules for rehabilitation and resettlement are impacting many large projects involving land acquisition. And, with Banerjee spending more time in West Bengal, where assembly elections are due next year, chances of the Railways slipping back into the deficit zone are no longer remote. Ministers are also complaining about Environment Minister Jairam Ramesh raising issues that have led to the stalling of road and power projects.
Ramesh apart, the infrastructure sector has not managed to see much improvement with targets for addition to power generation capacity during the current plan period, ending March 2012, likely to be missed. Similarly, Road Transport Minister Kamal Nath’s drive to build 20 kilometres of highway a day is yet to be achieved, though to his credit, the pace of construction has picked up to around 13 kms a day.
Even at the macro level, Mukherjee’s bigbang tax reforms in the form of introduction of a Goods and a new Services Tax and Direct Tax Code are still in the works.
If there is one minister who has turned from being top performer in UPA-I to being a non-performer in UPA-II, it is Civil Aviation Minister Praful Patel, facing criticism over mishandling of the Air India-Indian Airlines merger. Telecom Minister A Raja continues to be under the scanner, not just for the way he awarded frequency for 2G mobile services, but also for the way public sector MTNL and BSNL have performed.
Among the positives is the government’s drive to push through the Right to Education and bring about reforms in the education sector, including the entry of foreign players.