It’s that time of the year when heightened expectations on the economic agenda begin to dominate discussions. With gaps in revenue generation and a yawning deficit to bridge, finance minister Palaniappan Chidambaram will be the man to watch, as he readies to present what will be a crucial Budget in very testing circumstances.
If the first few economic headlines of 2013 are anything to go by, it does seem the United Progressive Alliance (UPA) government, bolstered by its recent successes on the reforms front – read FDI in retail and aviation, and banking reforms – is getting ready to bite the bullet with some hard decisions and present a pro-reformist image. The fiscal deficit target of 5.3 percent remains daunting, and falling growth has been making life difficult for policymakers in North Block.
However, the Union Budget is being seen as a possible mixed bag by economy-watchers and analysts, since it comes ahead of election year, 2014, and despite his best efforts, Chidambaram will be under intense political pressure to try and present a Budget which does not come up with too many hard decisions. That, more than anything else, will hold the key to how well the government tackles the economy over the next several months.
The recent decisions on the economic front, and statements from New Delhi, seem to suggest that more tough decisions to set the economy right are on the cards.
Already, in a politically sensitive decision, the government hiked railway fares with effect from January 21, its first hike since 2004. The hike – which is up to 40 percent in some cases – is a clear sign that the UPA, desperate to wrest credibility back in the international financial community, is prepared to bite the bullet on hard decisions ahead of the Budget.
Already, there is talk that more hard decisions could be taken ahead of the Budget. The mood, according to a report in The Times of India on 10 January, seems to be of pushing through major reforms before 28 February, and send a strong pro-reform signal to rating agencies as well.
The next – and equally vital – decision relates to the prices of diesel and LPG. In a move which is bound to create a flutter, there’s talk of hiking diesel prices by around Re 1 per month every month until the price of diesel is on par with the market, and the strain on the fisc reduced to that extent. A sharp hike in LPG prices is also more of a reality now than ever before.
Clearly, there are good reasons why the government is choosing to time these reforms well, and go for a sharp burst of speed now. One big reason is there’s hardly any time left for Chidambaram to get the economy even remotely back to the path of fiscal consolidation and try and reach the magic deficit target of 5.3 percent for FY13. The minister has tried to push the disinvestment agenda hard as a politically safe alternative and met with some success on that score. More such disinvestments are being planned. But the situation demands a quantum leap on reform and the government, perhaps, feels the time is now right to go for the kill. With rating agencies breathing down its neck, corporate India getting jittery and some success coming by way of success on FDI reforms, the government has clearly been emboldened to unveil tough measures now.
Growth, which has fallen to 5.3 percent in the second quarter of the fiscal, with the finance minister clearly concerned at the slowing pace. However, a few small positives have begun emerging – the higher than expected index of industrial production reading of 8.2 percent for October 2012 and slightly better stockmarket sentiment among them – and the government probably feels the time to act is now, before political compulsions come back to occupy centre stage. Significantly, rating agency Crisil has forecast a 6.7 percent rate of growth for FY14.
As the UPA’s reformists brace for more action – and reactions – economy-watchers and analysts predict a spate of reformist moves going forward. More banking reforms, fuel price hikes, disinvestments and a strict watch on government expenditure will dominate headlines in the next few weeks before Chidambaram presents his first Budget since returning as FM.
If Reserve Bank governor adds his bit to the government’s efforts on 29 January by easing interest rates, something it has so far resisted doing, then the overall mix will be a potent one. But with retail inflation still at elevated levels, the RBI – which has hinted at an easing of rates come January — will have to take a hard look at all factors before taking its call on rates.
For now, however, the government seems to be determined to go ahead with its economic agenda, RBI or no RBI. Time, some would say, to walk alone anyway.