Running on empty: The long, long wait for reforms

The policy machinery is increasingly beginning to look like a car stuck in the mud, which, despite pressing the accelerator, is unable to move forward.

Even as noises emanate from New Delhi about the government’s resolve to push reforms through quickly, with time running out and growth rates slipping, there’s an increasing clamour for concrete action on the ground.

The July Index of Industrial Production (IIP) print of 0.01 percent has just underscored the situation the economy is in, but few expect any dramatic action to rev up the economy just yet, given the problems the UPA government finds itself in. A crucial decision on hiking fuel prices has also been postponed yet again.

[caption id=“attachment_454646” align=“alignleft” width=“380”]  The Sensex is still perched above the 18,000 mark, with the market hoping for a reform push and cheering the fact that factory output, despite the very sluggish growth, is positive and hasn’t actually fallen year-on-year unlike the June reading. Beyond Limits/Flickr[/caption]

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Amid all this, latest reports say the government is moving quickly on the one avenue open for relatively smoother revenue generation: disinvestment. The Times of India reports that Oil India Ltd, MMTC and Hindustan Copper disinvestments are on the anvil, something which could lift sentiment. In fact, the BSE Sensex, as argued in another article here on _Firstpost_, has also jumped considerably, despite the overall gloom, thanks to the talk of a fresh reform push now that Palaniappan Chidambaram is finance minister.

The Sensex is still perched above the 18,000 mark, with the market hoping for a reform push and cheering the fact that factory output, despite the very sluggish growth, is positive and hasn’t actually fallen year-on-year unlike the June reading.

A cabinet meeting, which The Times of India says will be ‘agenda heavy’, is what everyone now seems to be banking on, since it is likely to take on board the crucial reform measures of allowing foreign direct investment (FDI) in multi-brand retail and in the troubled aviation sector. What comes out of the meeting is going to be crucial for the near-term and foreign and domestic investors will be hoping for steps forward in these two areas.

If the government is seen as pushing through these key reforms, it can work wonders for reviving sentiment.

Pause button again at RBI?

Even as Chidambaram and his colleagues at North Block battle it out to push the reform agenda through, one man who will be watching the developments carefully will be Reserve Bank of India (RBI) Governor Duvvuri Subbarao. Chidambaram’s pronouncements may have pepped up the markets, but they’re unlikely to have worked on Subbarao who will be waiting for concrete steps to bridge the yawning fiscal deficit. Hence, in the absence of any concrete reform steps so far, Subbarao and his Mint Road team would be unwilling to budge on their no-rate-cut stance.

In a note titled “No traction, no action,” HSBC says it expects RBI to keep rates on hold for now. Pushing back the timing for cuts, the foreign bank says given the lack of reform traction in India, it has also revised downwards its growth forecast to 5.7 percent for FY13 and 6.9 percent in FY14.

“While we have seen policy progress in Europe, the global economic backdrop remains decidedly challenging,” HSBC says in the note, highlighting the concerns on the economic front. RBI has refused to cut rates at its last policy review and wants visible signs of fiscal consolidation first. The central bank says the growth is still close to the non-inflationary ’trend’ rate, and hence leaves little headroom for rate cuts.

The HSBC note says since the last monetary policy meeting, global economic conditions have not offered much comfort. US indicators have softened in recent months. This has increased the likelihood that the Fed will step in again. In Europe, the real economy has continued to weaken, including in core countries, but there has been some progress on policies to address the debt crisis, including conditional promises of more ECB action.

On the inflation front, however, it points out that while the July WPI number fell marginally to 6.9 percent against the June number of 7.3 percent on account of the fuel-price related base effect, core inflation continued to be high, causing concerns for RBI. The central bank will review its monetary policy again on 17 September.

“Looking ahead, inflation is likely to rise as the deficient monsoon pushes up food inflation and hikes in diesel and kerosene prices finally materialise. Moreover, the supply-led slowdown has kept capacity tight and underlying inflation pressures simmering,” HSBC says.

Broking house Motilal Oswal, on the other hand, does bet on a rate cut at the 17 September policy. “The current IIP reading is another pointer that growth continues to moderate rapidly while inflation has seen some easing (albeit some pressure points remain). Thus, we would expect RBI to resume easing of monetary policy with a 25 basis points rate cut,” says the broking house, in a note following the latest IIP numbers.

The broking firm sticks its neck out, calling the current economic conditions “akin to recession rather than mere slowdown”, since the slowdown is widespread across sectors. The July 2012 IIP growth at 0.1 percent was lower than even significantly beaten down expectations (Motilal Oswal 1.5 percent and the Street 0.5 percent) and belied any hopes of revival soon, the note says.

For now, the immediate task for the UPA would be to manoeuvre that car out of the rut and get it moving again. Pushing through the disinvestments and seriously moving forward on FDI reforms are the two options available for now. Half-measures clearly won’t work anymore.