He’s on the right track

The FM’s reformist credentials give credibility to his confidence on setting the economy right

india Updated: Oct 09, 2012 22:43 IST
Hindustan Times

Finance minister P Chidambaram’s assurance to economic editors on Monday that he will draw up a roadmap for fiscal correction over the next five years has a ring of authority to it. During his previous stint in the ministry, Mr Chidambaram had managed to bring down the fiscal deficit from 3.9% of the GDP in 2004-05 to 2.5% in 2007-08. This was just before the sub-prime crisis forced India, along with the rest of the world, to pump up demand through a fiscal stimulus. The deficit shot up to 6% in 2008-09 and has remained elevated since. This year it is likely to overshoot the budget target of 5.1% by a full percentage point if the government does not get to work on it immediately, a finance ministry-commissioned report by Vijay Kelkar has warned. The finance minister sees this as a worst-case scenario and is hopeful of meeting tax revenue targets while raising some extra money from the sale of stock in State-owned enterprises and spectrum for telecommunications. The Kelkar report has proposed fiscal milestones for the medium term that are less onerous than the recommendations of the 13th Finance Commission.

Mr Chidamabaram’s optimism about the economy climbing out of the trough in the next two quarters is not shared by the International Monetary Fund (IMF), which has cut its forecast for India’s GDP growth to 4.9% for 2012. Persistently high food inflation will limit efforts by both the government and the Reserve Bank of India (RBI) to push the economy into a higher growth orbit. The investment rate at 32.8% in the first quarter is a percentage point lower than the year ago-number. This limits the economy’s potential to grow at 8%. However, the RBI has pointed out that the existing inflation-growth dynamic suggests that the growth trend line may have shifted downwards. The finance minister hopes to cut through this with a continuing stream of reforms that should spur investments.

Reviving the investment climate, reversing foreign capital flows and containing the fiscal bloat must top the agenda for India’s policy-makers at this juncture. Mr Chidambaram is signaling he is working on all three. The recently announced relaxation of FDI limits in retail, aviation, insurance and pensions have stirred up foreign institutional investments and the Sensex is flirting with 19,000. The rupee’s slide has been arrested and it is among the better performers in the currency markets over the last two months. The markets are obviously impressed by Mr Chidambaram’s economic management and his reformist credentials. There are initial signals that the animal spirits are stirring in other parts of the economy.

First Published: Oct 09, 2012 22:41 IST