The Hindu Business Line : Problems of success

The trajectory of the Government’s statements since it came to power in 2004 provides interesting clues to how it views the economy and what one should expect from it for the rest of its term. The Mid-Year Review of the Economy tabled in Parliament by the Finance Minister represents a downward movement in the expectations curve; for the past two years policymakers have exuded an exuberance that matched the economy’s runaway growth. No longer. In its last year a nd a half in office, the government seems to revert to the cautious optimism that marked its first year.

That guardedness is not apparent at first glance because North Block still assumes a nine per cent growth for the year. But that certainty wears thin in the face of problems that the very success of the economy has created in the form of surging capital inflows. The Finance Minister’s resultant caution on growth prospects represents the most significant expression by a policymaker so far that increased “capital inflows can impact macroeconomic aggregates”. Everyone can remember how for years successive Finance Ministers went round the financial capitals of the world beseeching investors to plant their money in India. Finally when that wish comes true, the government is unable to come up with the mechanism that can effectively handle the capital flows. The RBI’s sterilisation of excess liquidity is costing the exchequer dear with another quarter of continuing inflows still to come. The Budget policy to use $5 billion of the forex reserves for infrastructure has run aground and, so far, no initiative appears on the horizon; all the nation gets are warnings about adverse effects. The same goes for the millstone that has dragged down the economy for decades — subsidies. So far, all that emanates out of New Delhi are complaints about the rising burden of fertiliser, food and oil subsidies and the need to reduce these or target them at disadvantaged groups — paper solutions as old as the problem itself.

The mid-year review, therefore, sounds like a wake-up call without it being clear for whom the alarm rings. The fallout of the rupee’s rise — the decline in exports and probable job losses — till recently ignored by the North Block, is now seen the way the Commerce Ministry views it and the Prime Minister is likely to announce a few more sops soon. But that will not wish away the problem of rising inflows and the pressures on the rupee. A government that began with grand promises and generated vigorous optimism, if nothing else, now seems paralysed by problems of success. It is this lack of initiative that will affect economic aggregates adversely, not the surging capital inflows, as the Finance Minister told Parliament.

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