When the rupee hit 58.78 against a dollar earlier this year P Chidambaram, the Indian Finance Minister (FM), while talking to the media said that there was no need to panic as the currency would regain the losses and then stabilize. Among various other issues he talked on was “I am looking forward to more reforms…I expect a number of decisions in the next few days and weeks.” Among the decisions that he expected were on coal and gas pricing, coal allocation to power plants, FDI limits to various sectors including defense, etc. Ruling out any hike in import duty on gold, he appealed to people to resist the temptation to buy gold as that would immediately have positive effect on Current Account Deficit (CAD). Expressing satisfaction over the decline in the fiscal deficit to 4.8 in 2012-13, he said inflation had moderated and the economy was stronger than what it was last year. He ruled out any expenditure compression in the current fiscal and said that the government investments would continue.
While he tried in vain to put up a brave face it all seemed to be hollow. His efforts and those of the government proved to be futile as things kept sliding out of their hands. The rupee kept losing against the dollar and other major currencies, the current account and fiscal deficits kept mounting and the consumer price index spiraled out of control.
As the rupee declined and the stock market tanked the foreign, capital in debt and equity tapered off and the country lost the confidence of foreign investors. Added to it were the growing expectations that the US Federal Reserve would scale back its bond purchases soon enough slowing the flow of cheap money into higher yielding overseas assets. The rumours were a big blow as foreign money just gushed out of the country depressing the stock market hitting the rupee further. More bad news came in with the GDP registering an alarming 4.4% growth in the first quarter of the current fiscal – slowest in four years. All the sectors including agriculture, manufacturing, power, etc. grew only at around 3%.
In the pervasive gloom France’s biggest listed bank BNP Paribas SA pegged down India’s growth in 2013-14 from its earlier prediction of 5.7% to 3.7% - perilously close to the pre-reforms much disparaged Hindu rate of growth of 3.5%. The brave front put up by the FM melted away in no time and the man who was asking the country not to panic, seemed to in the midst of a panic attack. As things became desperate he admitted that fiscal deficit and CAD were getting out of hand and exports had tapered off and the rate of inflation refused to climb down – putting a great squeeze on the poor and middle classes. Despite declaring himself earlier against expenditure compression there was talk of austerity in the government – without any signs of it anyway.
Playing the unusual ministerial blame-game, the FM blamed his predecessor, who is now the President of the country, for certain wrong decisions taken between 2009 and 2011 hinting at his budget speech of 2012 proposing amendment to the Income Tax Act enabling taxation on off-shore mergers and acquisition of Indian assets with retrospective effect (Raghuram Rajan, the new Governor of the Indian Central Bank, termed it a “capricious” decision) to overturn Supreme Court’s judgment. The foreign investors became suspicious of India’s intentions and avoided entering the country with investments big or small as established laws and policies could be changed overnight because of one man’s whims. Curiously the Prime Minister failed to foresee the implications and did not intervene.
Repeating ad nauseum that the fundamentals of the economy were sound and that the rupee would soon regain its loss did not help and the currency rolled down fast and hit the 68 mark. As it did so the three economists in the government went into a huddle to parley with the Prime Minister’s economic adviser. In the meantime, however, desperate actions like hiking of import duty on gold was taken, simultaneously imposing a ban on sale of gold coins, medallions, etc. was imposed. Desperately looking for foreign investments the government relaxed (with unwise conditions) FDI caps in 13 sectors including the telecom. The telecom shares promptly registered a rise.
Inheriting a fast growing and robust economy from the National Democratic Alliance government in 2004, the United Progressive Alliance, attempting something different, squandered the opportunity of taking it forward and messed it up by virtually taking a U turn in going in for “inclusive growth” which did not materialise in its nine-year rule, anyway. By its own admission, 87% of people need subsidized food in 2013. In 2004 the CAD was in surplus and the forex reserves were in surplus vis-à-vis net external debt. Today while the reserves have shrunk to around $270-280 billion the government has run up an external debt of $390 billion. The consumer price index (CPI) was around 3-4% and today it has hit 11% with food inflation at 18%. Many have been tempted to relate the current economic situation to that of 1991 with high fiscal and current account deficits, high interest rates and CPI, capital flight due to waning investor confidence, trade imbalances, burgeoning external debt etc.
The government played around with the riches it inherited in 2004 and indulged in profligacy. Not only it launched the MNREGA and JNNURM involving billions of rupees with nothing much to show for asset-creation – giving fillip to corruption. It also waived off farmers’ loans and bailed out the sick Air India. It even permitted massive outflow of dollars for buying property abroad by the rich.
Experts see the current economic predicament as the consequences of high profile corruption scandals involving mindboggling sums of money, eventual policy paralysis slowing down many key economic decisions and, of course, political gridlock. With nothing much achieved, the government continued to dither ruining the once-promising economy. With coffers full, it took the socialistic path to win votes forgetting that 50 years of socialism did not take the country anywhere – regardless of “garibi hatao” campaign. Poverty and hunger cannot be removed overnight by opiates. Only industrialisation can remove them as it did in the West two centuries ago, in Japan a century back and now in China. Even in India millions were lifted out of poverty during the years of high growth after its economic reforms in 1991.
FM recently announced a slew of inconsequential austerity measures like banning meetings in 5-star hotels, purchase of new vehicles, creation of new jobs and filling of vacant posts, restriction on foreign travels, size of delegations going abroad. Besides, ministries have been asked to reduce 10% of their respective non-plan expenditure. These are mere tokenisms and are not likely to make a dent on the current economic disaster. Unless subsidies, including on food, are taken care of nothing much will be achieved.
Chidambaram and Co. are too obsessed with votes and building vote banks. Country’s economy requires hard decisions keeping the country’s future prosperity in view and not the votes ruling combine can muster at the hustings. Political manipulation of the economy has been the bane of the country and, unfortunately, one hasn’t seen the last of it yet.