market — the Sensex ran up to 19,000 within days of Singh’s “money does not grow on trees” speech.
Yet not everyone is convinced that Singh will be able to keep the pot boiling. The International Monetary Fund and the World Bank have both lowered their expectations of India’s growth this year and rating agency Standard & Poor’s still feels the country faces a one-in-three chance of a sovereign credit de-rating. Issues remain: fiscal bloat, fragile investments and obdurate prices.
Those who see the India story of 2012 as a glass half full and others who don’t have something in common. Both want much more reforms on the UPA’s plate before it hunkers down for the next general elections. Enter P Chidambaram, a man on the same page as the PM. His job is to flesh out Singh’s vision of an economy that can hop back on to an 8% growth trajectory soon, hopefully well before 2014.
I can discern Chidambaram’s strategy from some of the statements he’s made this past month. He has pitched for an investment board with overarching powers to kick-start infrastructure projects stalled for want of clearances at various levels of the administration. If this idea makes it past the expected resistance from his Cabinet colleagues, we are looking at a really big pay-off from a really big infrastructure push.
Around R1.5 lakh crore is stuck in roads, ports, and power plants that are awaiting a go-ahead from government agencies. A super Cabinet for these, with Singh at the helm, could bring us closer to the way China builds its infrastructure.
Next Chidambaram wants to resolve all pending issues with states over the goods and services tax that will help India become a common market. The 13th Finance Comm-ission had estimated that the switch to the uniform tax will knock 1.22-2.53% off retail prices and bump up economic growth by 1.5 percentage points a year, leading to better tax collection at all levels. The states have been holding out over compensation for the central sales tax, which will be withdrawn, but Pranab Mukherjee had sorted out the matter in his last days as finance minister.
The other bit of tax reform, the Direct Tax Code — initiated by Chidambaram during his previous stint as FM between 2004 and 2009 — has reached the last leg of the parliamentary process after several revisions. The FM will now be looking to push both. If he manages to pull it off, Chidambaram will go down in history as having overhauled India’s horribly antiquated tax system. If this happens, look out for a quote from his favourite Thiruvalluvar on this in the next budget. In 2005, he had moved the economy to a value-added tax on merchandise.
The third leg of the strategy is to financially manage the subsidies the Congress hopes to return to power on. A pilot project launched recently on cash transfers for fertiliser subsidies using bank accounts, Kisan credit cards and Aadhar numbers offers a way out of the strain exerted on the treasury by the UPA’s growing list of entitlements. Subsidies on food fuel and fertilisers are likely to be 2.4% of the GDP this financial year, Chidambaram told the Planning Commission last month. He is looking at the end of the plan in 2017, as the time when the delivery of all subsidies will be made through cash transfers.
Electronic cash to reach subsidies straight into individual bank accounts is far more efficient than any system we have now. It sidesteps the twin traps of doles reaching those who do not need them and not reaching those who do. Chidambaram is banking on eliminating the free riders, thereby giving his party space to promise more, like the right to food. Each of these initiatives really packs a punch. And none of them is as contentious as, say, foreign investment in supermarkets and insurance. The fact that there is movement on so many fronts together — the Cabinet has cleared 44 proposals in three heroic meetings — shows that some of the resistance is ebbing.
Singh had a supportive PV Narasimha Rao when he was pushing through some of the toughest choices India had to make in 1991. Chidambaram today has an active ally for his agenda. The PM has managed to convince his party, which has been in denial over the economy for far too long, that the time for action is now. Singh has also risked wrecking the ruling alliance for reforms. It’s now left to Chidambaram to pick up and run with it, completing the 100-metre dash.