Economic reforms and attempts to
intergrate a national economy with the global market place have always invited
resistance all over the world. With the ongoing global recession, there is more
revolt in advanced countries to address the unemployment problem by adopting a protectionist
stance.
For more than fifteen years, the
big ticket reforms in India were kept in a state of suspended animation and
even the attempts by then Finance Minister in 2011 to push the FDI in retail
trade did not take off. Has any miracle taken place between November 2011 and
October 2012? Yes. 2012 appears to remind us the crisis days of 1991.
Faced with the plausible investment
downgrading of India, a slew of reform measures such as the hike in Diesel
price, opening up of FDI into retail multi brand and Pension Funds, allowing
the foreigners to have a larger stake in Airline and Broadcasting industry,
raising the FDI cap in insurance and privitize four public sector undertakings have been announced by the do little prime
minister, as if it is a final economic act
in his last political innings and alsom divert attention from coalgate
andevergrowing corruption scandals.
The second wave of reform is a
signal to the international community that India is getting out of political
and policy paralysis, in order that both domestic and foreign investors would
renew their efforts and release the necessary animal spirits and greed of
profit to help uplift the growth. Why
FDI route now?
A very brief recap to understan
the current economic impasse and explain the rationale
for resorting to FDI. The essence of Manmohan’s fiscal revolution in 1991 was
to contain inflation and inflationary expectations and also correct the unbriddled
current account deficit. Through out 1990s and early 2000s, despite the absence
of any serious debate or political consensus on reform and no political party
coming forward explicitily to glorify the reform exercise, except when they
ruled the country, the reform process continued by fits and starts under
different political dispensations.
In the immediate post-1991 period,
with the control of inflation and improvement in current account balance, and
modest success on fiscal front for some time, current account convertablity
came to be ensured .With gradual depreciation of rupee, the export sector
revived with some robustness. A combination of favorable circumstances, more particularly
the unleashing of the animal spirit of entrepreneurs pushed India towards a higher , double digit growth trajectory, next only to China. Continual capital inflows took care of the
current account deficit which was ofcourse within moderate limits and as a
result the rupee was also kept stable and strong. On many occassions the rupee
had a tendency to appreciate and the RBI resisted it by intervention in the
foreign exchange market and later sterilized the inflationary consequences of
balance of payments related changes in money supply by selling government bonds
and squeezing the excess money supply via open market operations- an instrument
of monetary policy.
All these belong to the past. The
global financial crisis of the late 2000s, which got compounded first with
energy and food inflation, and later Euro zone crisis created a very strange
situation. Close on the heels of the side effects of sub prime lending crisis
in the U.S and its logical corollary, the Global recession, when combined with
the emergence of European Soverign Debt crisis, leading to furthur
intensification of world wide recessionary conditions, the growth of the Indian
economy got the beating. From a peak growth rate of nearly 10%, it has slumped
to just 5% plus now. This is still a respectable figure against the backdrop of
low and negative growth rates in the developed countries .It is not just external
recession – the shrinking foreign market for India the much worrisome factor is
shrinking domestic investment expenditure -an unwillingness to take fresh
commitment and go for diversification of business.
In the face of slow growth and
shrinking investment as also an explosive inflation and steep depreciation of rupee
both the import bill as well as the subsidy bill got escalated; the oil and
gold price soared. The result: current account deficit widened and the fiscal deficit
also worsened. This was precisely the time, we wanted more capital from
international market but the out flow was more than the inflow last year.
Under the circumstance the policy
alternatives such as reducing interest rate and raising Govt expenditure were
completely ruled out. With inflation remaining high, interest rate cannot be
lowered- further more, there is little elbow room for expansionary fiscal policy
when both fiscal deficit and debt are on the rise resembling slightly like a
variant of the crisis prone Euro-Zone
Consumnption demand alone plays an important
role as the key driver of growth. The only other option left was to improve the
supply side and also streamline the distribution chain of the economy and thus
lift the growth profile. Under this circumstance only, the much delayed second
round of refrom- a sort of Big Bang reform came into being in order to give a
signal to the international community that India will continue to travel on
reform path no matter how the deepening political uncertanities are.
Therefore the reform measures announced by the
Government must be understood in this context of an impending plausible
economic crisis, not of the 1991 variety but having all its residual flavor and
hence the necessity to take a preemptive
measure by the Government. The policy induced right investment climate is
expected to encourage more capital inflows, which would help mange current
account deficits and prevent the rupee slide.
In this context it is important to
underline that the newly appointed chief Economic Advisor has drawn attention
to the danger of excessive reliance of short term capital for managing the
exchange rate and current account imbalances; but when the debt and deficit
have become a matter of serious concern the FDI route has been chosen to correct
the economic impasse and buy peace. All these measures, of course do have the
political fall out, on the eve of State Assembly Elections next year and
parliamentary election thereafter.
While cutting fuel subsidy and arguing
that their diesel price must be aligned with international price, its cascading
effect on inflation and future inflationary expectation must be kept in mind.
It’s time; the Govt also shared the burden of adjustment by reducing excise /
sales tax component so that price hike shall be calibrated and moderated.
Following Bush language, it has
became a standard practice to say and suggest that food inflation
is largely the consequence of escaltion in demand for high end food products like
meat, egg and milk away from cereals and that FDI in retail, with all back end
infrastructure will help streamline the
distributioin chain, augument supply and provide a better price for the farmer
as well as consumers.
This is only a necessary but not a
sufficient condition for tackling food inflation. Agriculture as a neglected sister
has been suffering for long, for varied reasons, many of which have been the
byproduct of globalisation process itself and lack of inertia on the part of
government, in not cleansing the cobwebs enveloping it.
It’s time the authorities really
understood the gravity of the crisis in Agriculture as they have grasped the
plausibel economic crisis. All issues related to irrigation, water, farm land
take over for factories and plot conversion, lack of access to farm credit,
bungling in micro credit, pricing of farm produce and targeting food subsidies
only to the poor, and so on deserve more attention than ever before. More
importantly, the most frustratingly irritating factor that might undermine the
confidence of the international investors is going to be the plausible vaccum
in political leadership and the distinct possibility of a hung parliament in 2014.
Prof. D. Sambandhan
12-12-12
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