P Chidambaram’s audience has reacted positively to his first comments on the economy since taking over as finance minister last week. The stock market is up on the minister’s assurance that he will address investor concerns on taxes, government expenditure and interest rates.
Mr Chidambaram wants to spur investment to somewhere near 38% of the gross domestic product, where it was last at in 2007-08 when he was steering the economy. But the job description has changed in his second stint. The economy has lost a lot of steam, the sub-prime mortgage crisis has mor-phed into a bigger currency crisis, and the UPA has little appetite for reforms in the run-up to the next general elections. Throw in a truant monsoon and the odds are stacked against this resolute reformer. It has been argued, with merit, that the odds are impossible for any finance minister at this juncture unless he has backing from his party and allies on some pretty hard decisions.
The core issue facing Mr Chidambaram is the yawning trade and fiscal deficits. The central bank in its latest review of the credit policy last week pointed out, “Financing the latter from domestic saving crowds out private investment, thus lowering growth prospects. This, in turn, deters capital inflows, making it more difficult to finance the former. Failure to narrow the twin deficits with app-ropriate policy actions threatens both macroeconomic stability and growth sustainability.”
To show any measure of success, Mr Chi-dambaram will have to convince the Congress about the need to free diesel prices. He will have to dispel the states’ misgivings on the current shape of the proposed goods and services tax. He will have to take the allies and the Opposition along on deregulation in pensions, insurance and banking that will draw more household savings into building infrastructure.
Prime Minister Manmohan Singh has indicated there is a big canvas for reforms that are not held hostage by politics in India, and Mr Chidambaram has been quick to act on a review of the retrospective tax imposed in the latest budget on foreign transactions involving Indian assets. Accompanied with promises to speed up decisions on investment proposals and to work on lowering the cost of credit, this should soothe frayed nerves among the investors at home and abroad.
Mr Chidambaram will have to come up with answers on how to kick-start the country’s sputtering economic engine. And he has less than two years to arrest the trend of prices outrunning incomes. Given his credentials as a reformer, the next budget could contain some out-of-the-box thinking to restore faith in the India story.
The Congress has a lot riding on Mr Chidambaram, it would do well to give him the space he needs to conjure up an economic turnaround.