On Pranab's last day as FM, hopes of a new dawn for policy action

Oh, the irony of Pranab Mukherjee’s new-found verve to get cracking on the economy! On his last day as Finance Minister, during which tenure he did as much as any one man can to drag down a nation’s confidence in the economy, he will likely sign off with a flourish.

A flurry of policy announcements is expected today to arrest the free fall of the rupee, which plunged to new depths last week, and atrract inbound investments. Simultaneously, finance ministry officials are hinting at the launch of a dollar bond for NRIs, along the lines of the Resurgent India Bonds of 1998 and perhaps a hike in interest rate on NRI deposits.

There is also some talk of offering foreign portfolio investors a higher ceiling on investmetns in bonds issued by the Indian government as well as India corporates; the government is also signalling that it will get cracking on the qualified financial investor (QFI) window to allow foreign investors to buy into Indian equities.

Last week’s sharp plunge in the rupee, and the fear that it could shoot past 58-to the-dollar this week on continuing risk aversion in international currency markets, appear to have lit a fire under the government’s posterior.

Even so, these are merely the first of many policy initiatives that are required if the downslide in the economy is to be arrested. But for the first time, the government is talking the talk - rather than airily dismiss all concerns and criticisms - from captains of industry, domestic and foreign investors and from rating agencies.

Prime Minister Manmohan Singh, returning from his overseas travels, too said all the right things about what needed to be done to address structural failings in the economy, particularly to lower the subsidy burden and the twin deficits, and attract foreign investments. It represented the first time that the government was acknowledging the gravity of the problem. And although Manmohan Singh did not disclose details of the policy action that is expected, just the fact that his diagnosis of the economic condition reflected a rare sense of reality has inspired some hope of a new dawn for policy action.

There are, of course, many mountains to climb to get the economy back into high-growth orbit, but for the first time in months, analysts see some stirrings of determination on the part of the government to do the right thing as well.

“There is rising hope that the government will be able to undertake some policy actions after the Presidential election in July. We concur with the view,” notes CLSA economist Rajeev Malik. However, he also cautions that there have been too many “false dawns” - and dashed hopes - in the past.

“This time could be different - as was expected several times before- but don’t hold your breath for a born-again government,” Malik adds.

Other analysts too reckon that measures being contemplated today - such as the issuance of dollar-denominated bonds - may not go far enough to reverse the rupee’s slide of recent weeks. HSBC currency analysts led by Paul Mackel said in a research report that “this would only slow rupee weakness and not change the overall direction.”

For the rupee to strengthen more meaningfully and sustainably against the dollar, they added, “the government needs to do more than short-term patch work. It needs to undergo the necessary structural reforms.”

India’s wounds, as we’ve noted on Firstpost, are largely self-inflicted. In Budget 2012, Pranab Mukherjee virtually went after foreign investors with a tax bludgeon and reversed whatever enthusiasm had been building up earlier this year on anticipation of some meaningful action on policy to revive the economy.

And since then, economic policymakers in India have exhibited an alarming sense of detachment from reality, by taking comfort from the rather more grim situation in the world outside.

Through all this, and despite the regressive exertions of Pranab Mukherjee, foreign institutional investors appear thus far to have kept their faith in India. Net FII inflows (into Indian equity and debt) so far this calendar year are at about $12.6 billion, against $8.3 billion in the whole of 2011. And FII net inflows into equities is, at $8.5 billion so far this year, are striking, compared to the net outtlow of $0.4 billion in the whole of 2011.

Some of this may, of course, be the round-tripping of Indian money returning through the FII route. But as CLSA’s Malik points out, it’s also possible thatglobal funds, which did not have much of India in their portfolios, still seem to have faith in India and are being opportunistic.

The recent fall in international crude prices should, of course, have brought some relief to India’s current account deficit, but the continuing slide in the rupee has virtually neutralised any gains from that front. Which is why it’s doubly important for the government to go about trying to attract FII and FDI in greater volumes and check the rupee’s free fall.

Today’s anticipated policy moves are the first step, but more - much more - needs to be done.