A new team, of the prime minister and two of his trusted lieutenants, C Rangarajan and Montek Ahluwalia, has taken charge of the economy — and much is expected from this change of guard. There is a flurry of activity in North Block and Yojana Bhavan and many expectations have been aroused. Will Team Manmohan be able to deliver what the economy needs? They have some political capital to play with, as 10 Janpath is in panic mode. Will they use it for the right purposes?
Right now the focus is on changing perceptions. But the more substantive economic management agenda has five big items: reviving investor confidence, relieving infrastructure constraints on growth, reducing the fiscal deficit, containing the current account deficit and managing inflation.
Take the first: reviving the confidence of investors. Team Manmohan is clearly concentrating on sorting out the problems of the corporate sector on the clearances front and reviving confidence in the prospects for high growth. The string of senior figures from the corporate world calling on Montek Ahluwalia is a sure sign of this. Corporations are sitting on a lot of cash, and there is a real possibility of a sharp increase in investment demand if projects that have been put on a back-burner are revived. But for this to happen, apart from convincing companies that growth — and with it demand — will revive, a variety of regulatory bottlenecks and decision delays have to be resolved.
Many of the regulatory bottlenecks are at the state level, where a new type of crony capitalism is taking root. Many of these regulatory hurdles are not the product of socialist enthusiasm but simply one businessman using political contacts to screw another. With all the posturing and money-raising that is inevitable before elections, the PM’s team of non-political technicians may face some real difficulties in resolving these state-level problems.
As for foreign investors, the team clearly intends to moderate the rigours of the Budget provisions on tax avoidance and the retrospective changes that had spooked them. The recent appointment of the Shome panel is a clear signal. Already there are signs that this may work, as FII inflows into the stock market have increased and revived market sentiment. On this front one can say that there is a good chance of success.
The PM has spoken about reviving entrepreneurial animal spirits. He may also wish to do the same in the public sector so that project delays are cut down and PPP or similar contracts for roads and other infrastructure are finalised quickly. Public investment is still critical for infrastructure, because we do not have anything resembling a competitive market in critical areas like power and bulk transportation.
There is no quick solution for relieving the infrastructure constraints on growth, particularly for power. The usual summer sorrows about water and power that we are seeing now could continue if the monsoon fails to revive sufficiently. That is why Team Manmohan will have to browbeat Coal India into stepping up coal supplies and fulfilling its obligations under the assigned linkages. But even this will not help when tariffs fail to cover even variable costs.
The financial woes of the power sector are well known. The accumulated losses of the State Electricity Boards are now a staggering Rs 82,000 crore (after allowing for the subsidy they get), mainly because of the refusal to adjust tariffs. Judging by the response to the recent attempt to address this in Delhi, a quick resolution of this seems unlikely, with electoral calculations becoming more urgent. A relatively quick option is to make it much easier for surplus state boards and captive generators (and there are some) to trade power with deficit boards and distributors.
On the fiscal front, the figures for the first two months, when the deficit was about 27 per cent of what it was planned to be over 12 months, are not very promising. As of now, the Budget’s goals for the deficit look rather distant. The problem here is again political. The targets for the deficit cannot be met without reducing the burden of subsidies. Since food subsidies cannot be touched with the commitment on food security, the adjustment has to be in the petroleum subsidy. Though there is a lot of brave talk, one doubts whether Team Manmohan has political backing for the substantial increases in diesel and LPG prices that will be needed. The deficit will be under further pressure if the monsoon plays truant. Hence, something has to be done soon, given the expectations that have been aroused, if we are to avoid a downgrade by some international rating agency — which would add to our woes.
The other deficit that is of concern is the current account deficit. The real issue here is the trade deficit, which may amount to 10 per cent of gross domestic product in the last fiscal year. There may be some relief if commodity prices come down globally. Gold is a big import item and may have accounted for more than half of the trade deficit. A harsh restriction on gold imports always invites fears about smuggling and its attendant ills. But now there is a substantial investment demand for gold coins and bars mediated through banks. This can be contained through alternative financial instruments and import taxes. But basically the external deficit mirrors the excess of expenditure over income that defines the domestic deficit. It cannot be contained unless the fiscal deficit is contained. Since that looks unlikely this deficit too will remain a problem.
The prospects for inflation will depend on the weather, which, right now, is giving some cause for worry. The rice and wheat markets can be managed given the stocks available. The real worry is panic reactions under political pressure if a sudden supply crisis leads to a spike in some other food item. So Team Manmohan better keep a watch on the usual suspects like edible oils, onions, potatoes and tomatoes.
The overall picture that emerges is that Team Manmohan may well be able to show some revival of growth by the last quarter of 2012 from an investment stimulus. But their chances of success on other policy fronts like infrastructure, fiscal and balance of payments management and inflation control are less than even. I am afraid 9 per cent growth is becoming a distant dream.
