The global economic situation looks more fragile than ever. The present situation is perhaps worse than the time of the Lehman crisis on several counts. More economies are involved; the crisis has been brewing for a while and represents a tsunami that is overwhelming all defences. The collateral damage, when the crisis precipitates, will be greater.
And there seems to be no will for collective action as reflected in the near collapse of the G-20 dialogue at Cannes on the global economic situation and the way forward.
Unlike in the post-Lehman period which saw purposive action at the Summit level, on this occasion everyone seems reconciled to fend for themselves. With the US and France in full- blown election mode and therefore focused entirely on domestic concerns; German leadership facing stiff domestic opposition against any large scale bail out and Japan in an ongoing somnolent policy stance, there is a frightening global leadership vacuum. Among the emerging economies, China is too reticent; India relatively underweight and apparently lacking sufficient intellectual wherewithal and Brazil a bit unsure to fill this leadership vacuum.
The IMF could provide the technical expertise but in any case it cannot substitute for political leadership. In this situation, one shudders to contemplate the consequences of another shock to the system-breakup of the Euro zone or a sharp sustained spike in commodity, including crude oil prices-as capital rushes to the safety of tangible assets and out of reserves held in fiat currencies. The non-acceptance of the German bonds by the markets on November 23 shows that even the strongest sovereign offerings are seen as risky and in this scenario, appetite for fiat currency reserves could be weak.
With the prevailing climate of each country fending for oneself, Indian policy makers have their task cut out. They must act urgently and in coordination to insulate our economy from the coming global turmoil. The policy objective can be summarised as restoring investors' confidence by eliminating uncertainty. Additionally, efforts have to be made to achieve macroeconomic stability and implementing structural reforms to eliminate constraints on capacity expansion, which alone will help meet rising demands.
In a word, policy makers need to take steps to establish a Credible India which can retain domestic capital and attract capital moving out of Europe and other advanced economies that are faced with investors' fatigue and rising turmoil. This is of course easier said than done. But a start must be made.
Fortunately such a start has been made by the government's bold decision to allow 51% FDI in multi-brand retail. The decision will most importantly signal the end of policy drift and paralysis that had come to characterize the present situation
Measures that do not require legislative clearance and parliamentary approval should be implemented right away. Another measure is to de-notify the perishables from the coverage of the APMC act and allow farmers to sell directly anywhere in India. This will break the monopoly of registered operators in wholesale markets who take advantage of minor shortages and create unwarranted inflationary spikes.
Again, there is apparent unanimity but executive action, to be taken by state governments, has been absent. The only exception perhaps is Bihar where the Act was de-notified during the first stint of Nitish Kumar's government and has brought significant benefits, eliminating the rent-seeking behaviour of market inspectors and other petty bureaucracy.
Finally, the elimination of border taxes and octroi duties that act as barriers to inter-state trade and commerce should be on the agenda. Barriers to cross-border trade in agriculture produce results in waste in one location coexisting with scarcity in others. India needs to sign a free trade agreement with itself before it enters such agreements with other countries.
These actions will not only show the government's commitment to improving the economic climate, but also bring real benefits such as lower costs and prices. The agenda of reforms that require legislative action is needed in sectors such as the financial sector, tax regime and labour markets. Political parties need to shed their partisan interests and act in the national interest.
Perhaps, we have to work harder to convince our political class that the country faces real risk of being derailed from its path of rapid growth. That is a task for the readers of this column.
Rajiv Kumar is Secretary General, FICCI.