Awaiting the reform push

Though late in the day, policymakers in New Delhi are beginning to alter their perceptions of growth in view of the mounting evidence that the economy is slowing down. The Prime Minister's Economic Advisory Council's latest economic outlook revises its February estimate of 9 per cent growth for 2011-12 to 8.2 per cent — a substantial scaling down. But, as the Council notes, given the circumstances the global economy finds itself in, that level of growth too could be considered “high and respectable.”

Indeed it will be, considering the odds that are stacked against it. The global scene is so dismal that the World Economic Outlook thinks growth in the advanced countries in 2011 and 2012 will be lower than it was in 2010. The domestic scene is no less worrying; the Council introduces a refreshing note of candour in its litany of structural afflictions such as a decline in gross capital formation, “excessive government debt and political instability.” Together with the global crisis, they have “eroded business confidence, impacting asset creation adversely.” It is not entirely coincidental that Mr Pranab Mukherjee should have been waxing eloquent, at his meeting with India's key industrialists, on the steps the Government intends to take to narrow the ‘trust deficit'. Reassuring as his confidence was, it may soon lose steam if the Government does not pick up the gauntlet thrown by the Council in what could be considered one of its more forthright prognostic reviews. Reforms, it reiterates, are required to push the fixed investment rate to more than 33 per cent if the economy has to notch up 9 per cent growth.

What does this suggest? Since 2009-10, foreign direct investments have not improved much more than an average of around $33 billion. The council feels FDI is important enough to suggest that the government raise the ceiling for all sectors but Defence, nuclear energy and the like. This is a significant input, a categorical assertion of a more liberal environment to supplement domestic capital formation that, as the council notes, has dipped of late. As a former governor of the RBI, Dr C. Rangarajan is aware that the opposition to a higher ceiling on bank FDI from its current 33 per cent will be vociferous — all the more because western banks have not exactly been shining examples of probity. The Council is aiming for a kind of shock treatment to galvanise policymaking that has become mired in its various problems of late. Mr Mukherjee's promised ‘second chapter' of reforms must absorb and reflect the Council's message for upgraded reforms. Not merely a second chapter but a bolder script is the need of the hour.

COMMENT NOW