There is a bit of a Lone Ranger in Finance Minister Palaniappan Chidambaram. The FM assumed office last September with the economy in serious trouble, the budget presented by his predecessor being neither here nor there, and a central bank which was unwilling to budge from its stand on interest rates, given the fiscal mess and sticky inflation.
Today, many of the challenges still remain, but Chidambaram has managed to give a more decisive look to the United Progressive Alliance’s economic agenda. With some push from the government, Chidambaram quickly announced the government’s commitment to continue with economic reforms and made it clear that fiscal consolidation would be topping his agenda. This was backed by the UPA government pushing through a slew of reform announcements – foreign direct investment (FDI) in retail and aviation being among the most discussed.
Chidambaram’s first Budget since returning to the FM’s office managed to keep the fiscal deficit in check at 5.2 percent, with a promise to bring it down to 4.8 percent by FY14. In the meantime, seeing the government’s moves on the fisc, the Reserve Bank of India, which had stoutly refused to reduce rates, did lower benchmark rates as inflation showed some signs of easing and Chidambaram’s growth agenda desperately needed a helping hand from the monetary authority.
Cut to April 2013. The Prime Minister’s Economic Advisory Council, headed by C Rangarajan, has pegged FY14’s growth rate at an optimistic 6.4 percent, betting on better manufacturing performance and growth in the farm sector. Inflation has come down to manageable levels and there is a good chance RBI may oblige the Finance Minister with another rate cut – widely estimated at 25 basis points – when it meets again on 3 May. In fact, Goldman Sachs on 23 April announced it had brought forward its estimate of rate cuts to the summer of 2013 from early 2014. Goldman said it had been ‘surprised’ by the recent decline in headline inflation to 6 percent in March from 6.8 percent in February. Besides, gold and oil prices had fallen and the trade deficit had come in much lower than expected, it pointed out.
That’s not to say Chidambaram is responsible for all the positives which are aiding the economy just now. But the broad point is, the FM has managed to show a steely resolve and soldier on with the reform and fiscal consolidation agenda in the wake of heavy odds – both political and economic. The UPA, on the political side, is battling a hostile opposition, a seriously deteriorating law and order situation in the capital, the 2G scandal fallout and shaky support from some allies. But amid the chaos, Chidambaram has managed to remain focused on the task at hand.
He has kept his gaze fixed on the issue of delayed projects and has met bankers to understand the key reasons for this problem. Bankers Firstpost spoke to have said the FM has made it clear that these problems would be addressed on a war footing. This week, at a conference, he also said more executive decisions will follow over the next few months – a mix of small and big steps – to stay focused on the reform agenda.
While Chidambaram continues with the growth agenda and the PMEAC backs it up with a brighter-than-expected projection of FY14, analysts concede the FM will be up against a set of major challenges. The PMEAC too points to some areas of concern.
The current account deficit (CAD) continues to be a cause for concern, with the PMEAC projecting it at 4.7 percent of GDP – or $100billion – for FY14.
YES Bank’s chief economist Shubhada Rao, for instance, says despite the relatively comfortable position on inflation and the fisc, there are downside risks to the PMEAC growth forecast. Pointing to the higher services growth expectation which is powering the forecast – the Council expects services to grow 7.7 percent in FY14 as against 6.6 percent in FY13 – Rao says that will be a challenge. The weak industrial sector growth will stretch the services sector recovery too.
“We particularly remain worried on the prospects of an expectation of a sharp recovery in trade, hotels, transport and communications sector growth to 7.6 percent in FY14 against 5.2 percent in FY13. The still weak momentum of economic activity, not so encouraging prospects for trade and moderation in the discretionary demand is likely to keep the growth in this segment muted. We expect services sector to show a small improvement to 6.7 percent in FY 14 from 6.6 percent in FY13,” she says.
Analysts are bullish on the FM’s focus on project clearances and hope that critical issues of mining, power sector and fuel linkages will now be resolved with greater attention being given to them.
Perhaps the greatest challenge Chidambaram will continue to face will be that of political will from the UPA, given the current political turmoil and the compulsions it will bring. To that extent, despite RBI chipping in with rate cuts and the overall macro indicators turning that wee bit favorable, Chidambaram will still be walking alone.