In fixing economy, Chidu has no aces to play
P Chidambaram had a small window of opportunity to administer the kiss of life to India's down-and-out economy. But it already looks like those windows are slamming shut on him.
Misfortunes never come singly, but in the case of Finance Minister P Chidambaram, the fruits of his government's policy inaction of three years mean that he now has to face a whole host of challenges simultaneously in his attempt to administer the kiss of life to a down-and-out economy. And increasingly it looks like the windows of opportunity he had are slamming shut on him.
Chidambaram yielded to the inevitable on Monday when he acknowledged that India's economy would slow down to its slowest pace in a decade, at 5.5-6 percent this fiscal year. That's the slowest pace of growth since 2002-03, when the economy expanded by a mere 4 percent before going into a high growth orbit. Chidambaram today calculates that "barring unexpected shocks, growth will bounce back to 7 percent next year and to 8 percent in 2014-15. But given the factors that account for this slowdown, and the improbability that economic policies will be reoriented sufficiently towards growth in the short term, those growth projections seem more than a trifle unrealistic.
That's entirely of a piece with the wishful prophecies made by economic policymakers in the past two years, starting from former Finance Minister Pranab Mukherjee. They had been in abject denial to the factors that were causing the economy to stall: a runaway increase in deficit and heightened government borrowings that were crowding out private investment.
To Chidambaram's credit, ever since he took over as Finance Minister, he at least began to acknowledge the enormity of the problem he faced, and with tentative support from Prime Minister Manmohan Singh, began to scratch the surface of addressing the subsidy burden by raising diesel prices and initiating a move to trim LPG subsidies.
But even at that time, as Firstpost had noted, he had only a small window of opportunity to fix the macroeconomic picture, given the unstable political environment and the prospect of early general elections - and the consequent spending binge that would his government would have unleashed.
Today, many of the assumptions that underlay Chidambaram's effort to rein in fiscal deficits - the proceeds from the 2G spectrum auction, and the rationalisation of subsidies - are coming unstuck. The aggressive revenue mobilisation target from the 2G spectrum auction, which had been pencilled in into Chidambaram's roadmap for restoration of fiscal rectitude, may prove unrealisable, going by the experience of the CDMA auction.
Tata Teleservices became the second company after Videocon to drop out from the CDMA auction process. This dashes the Telecom Ministry's plans of holding two separate auctions for airwaves used by GSM and CDMA-based mobile phone carriers, from which it hoped to harvest as much as Rs 40,000 crore - in order to bridge the fiscal deficit.
The 2G auction flop could play havoc with Chidambaram's macroeconomic numbers even more than the ongoing rethink currently under way in the government on the political wisdom of imposing the cap on subsidised LPG cylinders to 6 a year. In the thick of the campaign for the Himachal Pradesh Assembly elections, the government announced a hike in the price of non-subsidised LPG, but had to hurriedly roll it back to avert a political backlash in the hill State where the Congress is looking to dislodge the incumbent BJP.
Now that its numbers have gone awry, the government is busy cutting back on investment expenditure and deferring it to the next financial year, which effectively takes away the growth drivers that the economy needs.
Arvind Mayaram, economic affairs secretary in the Finance Ministry, told Reuters that "those expenditure that can be moved to the next year would be moved, instead of being done this year. He added that the government was determined to keep the deficit to 5.3 percent of GDP this fiscal year, and would do whatever it takes - without having to resort to across-the-board spending cuts.
Chidambaram still perhaps reckons has one last shot at revenue mobilisation through an aggressive disinvestment process. This year's budget had set a disinvestment target of Rs 30,000 crore, and at one time, things certainly looked so propitious that it seemed possible that the government would end up mopping up perhaps even twice as much. But as with all other things, the delay has meant that that target has become susceptible to vagaries in the marketplace.
Today, the outlook on the markets isn't particularly rosy. The global markets may have been enthused briefly by the prospect of a victory for US presidential candidate Mitt Romney, who was seen as a friend of the market, but with the latest opinion polls putting the US election a dead heat, but giving Barack Obama a shot at securing a re-election, the markets may lose their verve.
As if all that weren't enough, the political environment at home too is turning uncertain. Talk of early elections is in the air, and will likely gain momentum after 20 December, when the results of the Assembly elections from Himachal Pradesh and Gujarat are out. If the BJP fares less than spectacularly in these two States, the Congress could look to capitalise on the disarray in the opposition ranks - epitomised by the ongoing power struggle in the central leadership of the BJP - to go in for snap polls.
That could upset all of Chidambaram's calculations in respect of revenue mobilisation from the disinvestment process. More critically, the spending associated with early elections would cause deficits to balloon at precisely the time when economic growth will be at its lowest in a decade.
Slower growth, and higher spending: that's precisely the scenario that ratings agencies will consider a recipe for a downgrade of India's sovereign rating. For the Indian economy, it represents the sum of all fears.
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