Now a change for the better

The rupee’s fall must make the UPA realise that it’s time to introduce critical reform measures.

It’s official. India’s economy has crashed to a decade-low growth of 5% in 2012-13, in line with the government’s estimates. This owes itself in large measure to a wounded manufacturing sector that barely crawled at 1% during the year. That output from India’s factories expanded at its slowest in the last 20 years bears testimony to the seriousness of the current crisis in the economy that until not-too-long-ago was leading global recovery. The widespread slowdown, coming as it does in the final year of the UPA government’s second term, will call for striking a balance that may involve a process of slow gingerly taken steps.

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As the government prepares for its home-run dash leading up to next year’s parliamentary elections, India’s key financial administrators and macro-managers are stuck with major headaches. Inflation may have moderated a tad in the last few months, but there have been very few periods in India’s contemporary history when prices have remained so stubbornly high for such a long period. The same amount of money buys fewer goods. Economic theory calls this phenomenon a fall in real income. There is no gainsaying the fact of the significance of prices in an election year. It’s a reality any government can ignore only at its own peril. At the same time, India’s business leaders have been rachetting up their demand for lower borrowing costs. Their argument: Costly loans and inputs have upset their plans. Firms can go ahead with their capacity expansion plans only if borrowing costs come down and new jobs can be created only when additional production lines are added. The Reserve Bank of India (RBI) has obliged with a third cut in the short-term lending rates this year, but with banks refusing to play ball these cuts meant little for they haven’t percolated down to the end borrower. The central bank had kept interest rates high for most part of the last two years withstanding mounting pressure from many quarters who have been arguing that high borrowing costs were hurting consumption demand and investment activity, both strong edifices of the India growth story.

To be sure, there are signs of a turnaround in the Indian economy, but only just. The RBI reckons that the GDP — will likely grow by 5.7% in 2013-14, by no means a V-shaped boom. The outlook on the price front, according to the RBI, is wobbly. The rupee, another key worry, is alarmingly hurtling down to its record lows. This can potentially negate the gains that the economy would have gathered on a few other flanks. With the next few months likely to set the tone for the 2014 Lok Sabha elections, political expediency will demand a fair sprinkling of populism even as industry captains and economists will be keenly watching the pace at which reforms are rolled out. Straddling both worlds could involve delicate tightrope walk. The burden of reform expectations to halt the slowdown on the government is too heavy, as also the need for a firm fiscal situation. The time for walking the talk has come.