The Hindu Business Line : Issues the Budget shouldn’t ignore

Apparently contradictory signals have emerged over the past three weeks from policymakers on the future course of the Indian economy. Will the growth slip or surge?

After the third quarter review end-January, the Reserve Bank of India reaffirmed continued high priority to combating inflationary pressures, and dashed industry captains’ hopes for an interest rate cut. By projecting a flat 8.5 per cent growth next fiscal, the RBI Governor, Dr Y. V. Reddy, projected slim chances of a rebound. Hitting again the recent peak of 9.6 per cent was never in the reckoning.

Inflation focus

Dr Reddy highlighted the surplus liquidity with banks that can be deployed, but apparently failed to infuse competition among them. Between halting the decelerating growth and holding the price line, the choice was tough.

The wholesale price index (WPI) rose 4.35 per cent year-on-year early February and was just a whisker away from 4.5 per cent, the RBI-prescribed comfortable level. It was still to reflect the impact of mid-February’s petrol and diesel price hikes, which would certainly have a cascading effect.

The inflation momentum is unmistakable. The capacity of the central bank to lower interest rates at this juncture in the face of high inflationary expectations is limited. The kharif crop has been below projections and the rabi is hit by erratic weather in the North and un-seasonal rains in the South.

The supply management is jinxed by soaring world commodity prices. Dr Reddy has been clearly on the defensive. He cannot tinker with interest rates now.

A different view

The Finance Minister, Mr P. Chidambaram, came out with his own recipe. Asked public sector banks to cut interest rates and even prescribed the quantum — 50 basis points. A damp squib? So everyone thought, reminded of a similar call earlier that drew a blank from banks.

A few days later, the Prime Minister tacitly endorsed the RBI stance on inflation, saying the issue would continue to be on the front burner but exuded confidence of achieving 9 per cent growth next year!

What should one make out of these statements? As a custodian of monetary management, the RBI took a conservative view of the emerging scenario anticipating extraordinary uncertainties ahead of us.

Besides inflation management, the RBI was fighting on two other fronts: Battling with foreign capital inflows and the strengthening rupee. A status quo on interest rates provided elbow room to address exigencies as global investors become more risk averse as US recession deepened.

Industry slowdown

The industry slowdown, induced to head off overheating, spread ominously. Four major broad segments were hit. Mining and quarrying group slowed to 3.4 per cent from 5.7 per cent last fiscal, manufacturing to 9.4 per cent (12 per cent), construction 9.6 per cent (12 per cent) and finance, insurance and other services to 11.7 per cent (13.9 per cent). Latest data showed, electricity generation 3.8 per cent crawled in December last, down from 9.1 per cent in December 2006.

Did the RBI slam the brakes too hard to cool the economy? . But then, achieving a soft landing is crucial for the Government with general elections round the corner. Can India convert the challenge of downturn into an opportunity?

The Manmohan Singh administration did it earlier. Despite pitched battles with the Left parties, which stalled labour and pension reforms, it leveraged the coalition partners to lift growth and proved international sceptics wrong.

It can do it again, provided there is the will. It should be ready to take calculated risks. There has to be a change in the mindset of the government to look for quick and unorthodox solutions. The need of the hour is to launch a comprehensive and integrated plan to put the economy on a higher growth path, a plan that inspires public confidence, and execution that impresses.

The debate on coupling and decoupling of the Indian economy globally will become irrelevant then. Performance speaks for itself. Dalal Street will stop looking for cues to the Far Eastern and US markets. It’s all a matter of perception and expectations.

So too international capital flows. The risk-wary international investors will find India a better bet. Instead of outflows, the RBI will have the headache of managing capital inflows. And international analysts will be occupied marshalling arguments how India has decoupled!

Budget agenda

The forthcoming Union Budget will provide an ideal platform to kick off the plan. The key is to align the fiscal policy to help rein in inflation, improve credit delivery and to assist industry turnaround.

Topping the agenda is giving a fillip to the sectors hit by decelerating demand and appreciating rupee. The Finance Minister appears to be finding a way out to lower interest rates immediately rather than wait for a RBI review in April. A master stroke, indeed.

He spurred public sector banks to cut their prime lending rates by 50 basis points. The arm-twisting is evident when State Bank of India effected a second 25 basis-point cut in less than a fortnight to fulfil the Minister’s diktat. Other banks willy-nilly have to fall in line.

Since this will be the last full-fledged Budget of the Manmohan Singh administration, one expects nothing but a populist Budget — sops to one and all, like farm and other loan waivers and rescheduling. But it should address the following key issues methodically.

Thrust areas

Leverage PPP (public-private partnership) for faster infrastructure growth in towns and cities under JNURM (Jawaharlal Nehru Urban Renewal Mission).

Launch JNURM-type initiative for export-oriented towns all over the country.

Institute immediate, short- and long-term measures for enhancing productivity in labour-intensive sectors such as textiles, leather, handlooms and handicrafts and gem and jewellery.

Remove regulatory glitches in credit flows to housing and sort out legal issues arising out of recent judicial decisions affecting hire purchase finance.

A Cabinet committee to monitor price trends by appropriate supply management, which may become easier if international commodity and crude prices soften as world growth slows.

At a time when world growth is slowing, attracting international investment and expertise to infrastructure projects will be easier and cost-effective. It’s an activity that has multiplier effect spurring faster growth in many industries.

Regulatory, legal issues

Simultaneously, the Finance Minister will have to tackle regulatory issues affecting bank lending. For instance, the RBI had asked banks to treat time-barred loans to the construction sector as NPAs (non-performing assets). Some leeway is required to restart lending.

Then, there are legal issues. Recent judicial pronouncements on bank loan recoveries have increased risks of mortgage and hire purchase financing. New norms, evolved jointly by all the parties to give comfort to lenders, as well as a reduction of interest rates, will help put back the auto and construction industries on fast growth track.

Once the package is in place, the risks for the Indian economy would reduce considerably. The emerging major risk, however, is political if Congress decides to go to hustings sooner than scheduled to get mileage from economic success.

(The author is a senior journalist based in Mumbai. E-mail: rc_murthy@yahoo.com)