Last year was one of the worst for the economy since the start of the reforms programme in 1991. The economy was whiplashed by four forces - sticky inflation, forcing the Reserve Bank of India (RBI) to raise interest rates aggressively; lingering policy paralysis as the government battled multiple political issues. Large fiscal slippages leading to crowding out of the private sector and uncertain global macroeconomic backdrop, particularly the European debt crisis. We are not out of the woods yet. The situation in Iran and its possible impact on global oil prices are likely to have a direct negative bearing on India.
While the FM can do little about Iran and oil prices, on some of the other fronts, we have seen significant improvement over the last couple of months. Inflation is showing signs of coming under control, recently reaching the sub-seven per cent levels. If this trend continues, RBI has indicated a rate cut would be on the cards in a few months. We have also seen some movement, even if half-hearted, on the policy front, to indicate the government is at last waking up from its decision-making slumber.
Will the government again go into a shell, post-UP? Conventional wisdom says setbacks in the Assembly elections would make the finance minister’s task in crafting a Budget harder. This school of thought believes management of the political economy is mostly about balancing the dichotomies between politics and economics. Given the UP setback, calls within the UPA to follow a more populist course, to open the purse strings a little wider and throw more money at the electorate in the two years leading up to the next general elections are likely to become shriller.
Yet, there is another way. One that will not only be good for the economy, but may well pay political dividends. That is to concentrate on growth. In a country like India, with its huge population of the poor, growth is both good economics and politics. Doing this will entail maintaining a fine balance between managing fiscal deficit and growth. An option is to increase revenue by raising indirect taxes. The likely possibilities in this regard are increase in general excise duty to 12 per cent and in some specific sectors, such as diesel cars and cigarettes can attract more duty, bringing more services under the service tax net and a marginal increase in corporate tax rate.
To jumpstart the economy and specifically investments, some sops are also needed for the infrastructure sector. Among these could be imposition of import duty on power equipment, removal of the cascading effect of Dividend Distribution Tax, extension of Section 80IA benefits beyond March 2012 and increase in the ceiling for claiming a home loan from Rs 150,000 to Rs 250,000 per year, among others. Also critical is putting the disinvestment programme on the fast-track. In this regard, the ONGC auction was a welcome sign. Sure, the process could have been handled better, but at least the government is once again thinking in terms of disinvestment. This could play a crucial role in curtailing the fiscal deficit.
Undoubtedly, it is a tough task that faces the FM. But when was governing India an easy task?
The author is Chairman & CEO, Edelweiss Group
