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With an eye on the accelerator

The PM has made it clear that UPA 2 plans to tackle the economic slowdown with reforms.

india Updated: Apr 03, 2013 23:37 IST
Hindustan Times

For an economy that is set to record its worst growth in a decade, Prime Minister Manmohan Singh has struck the right notes on the immediate policy priorities. It is first imperative to nurse the precarious health of public finances; the rest will follow as a natural corollary. India’s current account deficit (CAD) has soared to a record of 6.7% of gross domestic product. A widening CAD, which effectively means that India is buying more from the rest of the world than what it is selling, can turn out to be a big worry for policy makers in a slowing economy where fulfilling immediate dollar payment obligations may necessitate dipping into the pool of foreign exchange reserves. Fiscal deficit — shorthand for the amount of money the government borrows to fund its expenses — continues to remain a key concern. Taming the dreaded twin deficits, therefore, is a non-negotiable policy priority.

As the UPA government prepares for the home-run dash of its second term, Mr Singh will be acutely aware of one widely used concept of economic theory: constrained optimisation. It represents arriving at a set of best solutions to a matrix of problems. In a real economy, however, the most favourable way out for one set of problems could harm prospects somewhere else. Other things remaining the same, the most basic assumption in any economic modelling, may not apply in most real cases. For instance, if prices are rising steeply, slashing high interest rates may sometimes end up only fanning inflation. Striking a balance may involve a long process of slow, gingerly taken steps.

Mr Singh’s speech at the Confederation of Indian Industry’s flagship two-day annual general meeting on Wednesday, made it abundantly clear that reforms are the core of the government’s plans to halt the economic slowdown, despite political constraints. It is critical that the government gets the basics right: improve governance, liberalise financial markets, ease procedural delays and, above all, implement strict enforcement. Last year, Mr Singh silenced his critics with an action packed booster shot of reforms, boldly ushering foreign direct investment in multi-brand retail and aviation and demonstrated the government’s intent to walk the talk on fiscal discipline by raising prices of diesel and cooking gas. The prime minister’s candidness in admitting the non-tangible constraints — corruption, bureaucratic red tape and managing a restive alliance — are commendable, especially in an election year when populism, rather than policy prudence, becomes the oft-quoted catchphrase. Yet, as he himself pointed out, these conditions were present even when the Indian economy was sizzling at over 8%. It’s now about time to go the extra mile for the economy to gather speed.

First Published: Apr 03, 2013 23:10 IST