On February 28, as he closed his budget address by invoking Swami Vivekananda about the importance of making the right choices, finance minister P Chidambaram was probably underlining the sign of things to come — a break from India’s conventional politico-economic wisdom. “By 2025, we could become a $5 trillion economy, and among the top five in the world. What we will become depends on us and on the choices that we make,” Mr Chidambaram said in the final paragraph of his speech about setting the priorities right.
The significance of making the right moves cannot be more relevant than now when the economy seems to be falling off the deep end. A sinking rupee, which breached 68 to a dollar and is falling like a stone, rising gold and crude oil prices compounded by worries that the US might intervene in Syria and tanking share prices have made out a strong case for a departure from orthodox policy responses.
The conventional strand of thought tells us that, in normal circumstances, savings, investment and consumption are forces that keep the growth trend line aloft and it would be a triumph of hope over reality to expect them to play a counter-cyclical role.
That is the preserve of fiscal and monetary policy. The government admits these are difficult times with no significant headroom for spending its way out of a crisis. It needs to be seen to what extent the Reserve Bank of India, having run a tight money policy in the first half of the year, has the elbow room to reduce interest rates for the next 12 months.
The current snapshot of the economy brings into focus the constraints facing the government. Mr Chidambaram is determined to walk the talk on fiscal discipline and to stick to the consolidation roadmap he drew up last year. The tendency to give fiscal rectitude a pause runs strong in India but the finance minister rightly has been resisting it since the crisis broke out.
A falling rupee, after all, is the symptom of a deeper problem — a widening current account deficit. These are extraordinary circumstances. Flooding the economy with money may be necessary to climb out of the trough, but the sufficient condition requires demand to be bumped up through public expenditure when households and producers are winding down their spending.
Injecting more money into the system also carries the risk of further exacerbating the price situation. In an election year, keeping the lid on the inflation genie is critical. It is a tall task and by not ruling out any option to revive the economy, Mr Chidambaram has struck the right notes.
Some of these options may cause pain in the near term, but it may just be the right choice to swallow the pills now rather than allow the disease to spread.