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FOR WHOM THE (ALARM) BELL TOLLS

The government must act on regaining macroeconomic balance, taking decisions and creating infrastructure

As we begin this new year, it is incumbent upon us to be optimistic. However, when we look at the politico-economic landscape and couple that with the global environment, it is hard to maintain this sense of optimism. Let’s take the political landscape first.

We have a government that is completing Year 3 of its five year journey. But it is also in Year 8 of its 10-year phase in government and there are still two more years to go before the next election. The leadership of both the government and the party has largely remained the same in terms of the party hierarchy and its senior ministers. After eight years of effort in running a country as complex as India, surely some of these leaders must be tired and running out of fresh ideas. I am sure the idealism of making things happen must have long ago been replaced by the enduring slog of simply staying in power. And while power is itself an elixir, there must be those in government who must wistfully be looking at the opposition benches and envying them for their role of simply being able to criticise. The vim and vigour of the early years of government have long ago been lost at the altar of perpetuation of power.

And what of those in the opposition? Their tails must surely be up, but the wait is still long. Two years is a long time in politics, and while there must be hope, there must also be some anxiety about the long period of time left. After all, where was Anna Hazare even a year ago? Where was the eurozone crisis last January? Inflation had not yet reared its ugly head and growth was sizzling at close to 9%. Hence, while the opposition will bay for blood and do its utmost to loosen the grip of the government on power, it knows that it too must bide its considerable time. Meanwhile, in the snakes-and-ladders game of Indian politics, there are many snakes to watch out for, with the first one coming up in February in the form of the UP elections. Which way this goes will determine the tenor of the political discourse for the balance of the year.

Meanwhile, the 2G scam will now meander its way through the judicial system. This will be a leisurely affair, some of the accused having already served time, and unless new revelations surface, will slowly begin to fade from public memory. The Anna factor also seems at year end to be running out of some of its earlier heat and excitement. The public too seems to be getting dulled by more fasts, more debates (between the same faces on TV, and in Parliament), more CAG disclosures and more mining scandals. It seems everybody was in on the act all along, something that in any case mostly everybody knows. In the anti-corruption activism also, some new energy needs to be reinjected, else the movement will also slow-forward to nowhere —a shame, but something our politicians will certainly not mind. Political funding, meanwhile, the real elephant in the room, still merits no meaningful discussion.

Economically, India stands on the brink of an extended slowdown. What could be deduced as a mere possibility at the beginning of last year has now turned into a reality. The Budget forecast of 9% growth now seems hopelessly optimistic, as was the 7% inflation forecast. However, nominal growth will still end up at 16% — but with 7% growth and 9% inflation — which was always on the cards even when the FM so bravely stood to read out his Budget and the assumptions therein. The real tragedy is around the fiscal deficit and the high interest rate environment. This party has always chosen inflation control over growth, handouts to garner votes and economic reforms only under pressure. I am not sure whether in the minds of the economic minders of this government, that feeling of pressure is yet being manifest.

As with many other things this year, the outcome on economic policy action will depend on the elections in Uttar Pradesh. If the government does better than expected, it might either be emboldened to act with new-found confidence, or it might feel vindicated that reforms don’t really matter to their voters. So, it can cut both ways and only time will tell which way we move. 

So, what can the government do to move things forward this year that it did not do last year? What could be the government’s economic agenda for the year? First, there needs to be a very significant correction of macroeconomic policies. Mercifully, as a result of the base effect, inflation should moderate, and this will give the RBI room to manoeuvre rates down. This is absolutely critical. Second, the government must set a much tighter and more believable plan to reduce its fiscal deficit for the next financial year. This year’s number is already shot. Third, day-to-day decision-making in the key economic ministries needs to restart so that projects are cleared faster and the investment cycle can move forward again. Fourth, cooperation with state governments is critical and the Centre must take the lead in this and pass long-pending tax reforms such as the goods and services tax and the Direct Taxes Code. Finally, financial sector reforms including making longterm funds, which include FDI, more freely available for infrastructure projects. 

The reality is that we all know this. The trick continues to be in making it happen. And with a government that looks jaded for now, and a country that at least in the short term is losing confidence, we need change to happen fast, else we will continue our drift into a 6% growth trajectory — which will neither create jobs fast enough, nor will it help close the gap on the developed world. The alarm bells have gone off and now there is simply no time left. Else, 2012 will be another lost year.

Source: Economic Times