At the crossroads

The best thing about the year gone by is that it saw the Indian economy showing signs of ‘bottoming out’. That happened sometime after June-July, which witnessed a perfect storm of negative industrial growth, wholesale inflation close to 8 per cent, weak monsoon activity, and the rupee hitting an all-time-low of Rs 57.22-to-the-dollar on June 27. To cap it all was, of course, the sense of a ‘policy paralysis’. But from August, the monsoon staged a turnaround, helping to ease inflationary expectations. By mid-September, the Government, too, had woken up from its stupor to announce reform measures – from hiking diesel prices and capping sales of subsidized LPG cylinders to allowing foreign supermarket chains to set to shop – to revive investor sentiment. That was also the time when the US Federal Reserve and the European Central Bank launched aggressive bond-buying plans, opening the floodgates of global liquidity. Some of it flowed into the Indian markets: More than half of the 25.7 per cent rise in the Sensex during the year – compared to a 24.6 per cent decline in 2011 – happened just over the last four months.

All this has, however, given only a temporary breather. The rupee’s free fall may have ended, but its underlying weakness from a widening current account deficit in the country’s balance of payments remains. The not-so-bright outlook for exports in a sluggish global economy has, if at all, only increased India’s dependence on capital inflows and the concomitant need to assure foreign investors that its long-term growth story is still intact. Likewise, the easing of inflationary pressures may create some room now for the Reserve Bank to cut interest rates. But that alone will not revive a stalled investment engine, key to bringing back real growth capable of generating new jobs and higher incomes. The already overleveraged balance sheets of many corporates does not make the situation any less easier.

2013, in that sense, presents a huge challenge, especially for the Government. Demonstration of fiscal discipline and reform intent won’t be easy, when the temptations of following the beaten track of populism as poll season approaches are obvious. A string of State elections in 2013, culminating in a national poll in the following year, makes commitment to fiscal rectitude particularly an uphill task. But good economics and focus on growth can also make for good politics, as Narendra Modi’s three-in-a-row victory in Gujarat, perhaps, proves. Moving to a system of making all welfare payments (including subsidies) through direct transfers and redirecting the resultant public savings into productive infrastructure investments is a message that the electorate, increasingly weary of leaders mouthing old shibboleths, may well ‘buy’ today. It is for the Government to take up this challenge in the belief that the worst is over and things can only improve from here. But if they don’t, the results aren’t going to be good either for the economy or for it.