The Prime Minister's speech in Parliament last week attracted a lot of debate and discussion. While the speech was politically significant in that the PM was combative and rose to defend his own reputation, on the economic front, however, it left analysts cold. Other than repeating what Finance Minister Palaniappan Chidambaram and other officials at North Block had been saying for some time, Prime Minister Manmohan Singh did not come up with any clear roadmap on how he plans to turn the economy around.
With the first quarter GDP figures coming in at a mere 4.4 percent, and all major parameters pointing to a major slowdown across most segments of the economy, the PM and his colleagues have been repeating how the rupee was hit owing to the uncertainties on the global front, in particular the Federal Reserve's imminent tapering of the Quantitative Easing (QE) program. For good measure, however, the PM did add that the large current account deficit (CAD) and other domestic factors also took a toll on the rupee.
The PM, however, added that given the current situation, it was now time for the more difficult, politically sensitive reforms to be implemented. The implementation of insurance and pension reforms, the Goods and Services Tax, the reduction of subsidies and eliminating bureaucratic red tape were specifically mentioned by the PM in his speech.
"These are not low hanging fruit and need political consensus. It is here that I urge Members across the political spectrum to reflect on the need of the hour. Many laws that are necessary are held up for lack of political consensus. Reforms such as the Goods and Services Tax, which everyone agrees is essential to restore growth, require States to come to an agreement. We need to forge consensus on such vital issues. I urge political parties to work towards this end and to join in the government's efforts to put the economy back on the path of stable and sustainable growth," the Prime Minister said. Significantly, in a similar vein, putting up a 10-point action plan, Chidambaram had also called upon all parties to work together and help the government bring the economy back on the rails.
While the PM's speech and the FM's before it can be seen as valiant attempts to forge a political consensus on economic reform, the ground realities so far have been quite different. Apart from these general statements of intent, there has been little evidence of what the government intends to do on the broad reforms front. Thus far, its attempts have been essentially to fight the immediate fires, particularly on the foreign exchange front, to cushion the movement of the rupee.
In fact, analysts have been worried about the implications of two major legislative actions which the UPA pushed through recently - the Food Security Bill, widely seen as a major populist move which would dent the coffers of the government considerably and add to the fiscal deficit, and the Land Acquisition Bill which has the corporate sector up in arms and is seen as a move which could delay future projects. Ratings major CRISIL, for instance, has said it fears the Land bill will lead to an increase in the gestation time of projects and overall costs.
Reports now say the government is seeking to give a major, last-ditch push to some reform-oriented bills and get them cleared in Parliament before the election season sets in. A Mint report of 2 September says the UPA wants to extend the monsoon session, already extended by a week, by one more week in a bid to clear some pending legislation on reform.
This sudden bid to push reform has clearly come at the eleventh hour, with very little room left for the UPA to step on the accelerator. The sudden return to a reformist posture, at least in announcements, contrasts with the looming elections and the two Bills already passed, which have major implications.
The economic situation, of course, does merit a serious reforms push. With the latest growth figures, CRISIL feels unlike a sharp U-shaped recovery which came about in 2009 after the Lehman crisis, this time growth would oscillate around the 5 percent trough in an L-shaped trajectory. Kotak Mahindra, on the other hand, cut its growth projection for FY14 to 4.6 percent from the earlier 5.2 percent after the figures showed a widespread slowdown. On 2 September, the latest HSBC Purchasing Managers Index print came in at 48.5 in August, indicating a contraction in manufacturing activity, the first in over four years. The weakness was owing to a decline in order flows both domestically and from overseas.
"Looking ahead, growth is likely to slow further as the RBI will need to keep liquidity tightening measures in place and heightened macroeconomic uncertainty dampens domestic demand," HSBC said, pointing to a bleak immediate future.
Underscoring the need for urgent domestic reforms in India, an analysis in The Wall Street Journal last week, titled "India's Salvation is at Home", pointed out that policymakers had not yet addressed the deeper difficulties. The Journal article says India's economy doesn't look like it has bottomed out, since household consumption was still weak and investment hadn't recovered, a fact amply borne out by the latest GDP trends. Growth, the article said, had nearly halved from five years ago because policymakers delayed reforms. Policymaking had also become unreliable, it added, saying that India could blame the Fed only so much and held most of the answers to its troubles itself.
Whether the UPA actually manages to find the answers to the current problems or gets fully into poll mode will be the key, going forward. By the looks of it so far, despite the pro-reform noises, few would be willing to stick their necks out and bet on the government successfully pushing through a tough reform agenda.
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Updated Date: Dec 20, 2014 23:51:24 IST