Can Chidambaram Rescue India's Battered Economy?
Faltering growth, fleeing foreign investors and the specter of global credit ratings agencies downgrading the Indian economy to junk status from the current lowest investment grade, are finally forcing the ruling United Progressive Alliance (UPA) government to attempt to put its fiscal house in order.
Growth, which slumped to a nine-year low of 5.3 percent in the first quarter of 2012, was crippled further by a deficient monsoon that has whittled down agricultural output and sent food prices soaring. Persistently high inflation - 7.25 percent in June - prompted the central bank to hike interest rates to rein in prices. Meanwhile, international credit ratings agencies including Fitch and Moody's Analytics have forecast sub-6 percent growth for India in the fiscal year to end March 2013, the worst in a decade.
The uninspiring economic performance is having a corrosive political effect. An India Today-Nielsen opinion poll last week said that were an election to be held today, the Congress-led United Progressive Alliance would be bested by the largest opposition party, the National Democratic Alliance.
“The government’s skewed tax policies, a debilitating policy paralysis coupled with political volatility have taken the sheen off the India growth story,” said economist and Professor K.N. Dixit of Benares Hindu University. “Not too long ago, the country was spoken of in the same breath as China. But now that global awe has vaporized.”
That the worries over a battered economy are weighing on Prime Minister Manmohan Singh’s mind was clear as he delivered the 65th Independence Day address on August 15 in New Delhi. The premier, the architect of India’s transformational globalization drive in the 1990’s that saw annual GDP growth touch 9 percent, dwelt on the country’s hostile political climate, which has not only soured the India growth story but also affected national security.
"If we do not increase the pace of the country's economic growth,” said Singh in his speech, “take steps to encourage new investment in the economy, improve the management of government finances and work for the livelihood security of the common man and energy security of the country, then it most certainly affects our national security."
Consistently high food inflation, corruption and policy paralysis have eroded the electorate’s confidence in the ruling political establishment. Middle-class angst has resulted in widespread support for mass agitations led by yoga guru Swami Ramdev and activist Anna Hazare.
A beleaguered Singh has been under mounting pressure to reconstitute his cabinet ahead of the 2014 general elections. His inclusion of Palaniappan Chidambaram, 67, as finance minister (after the post was vacated by Pranab Mukherjee who is now president) was part of a larger UPA game plan to help India get back on its high-growth trajectory.
A Harvard Business School alumnus, Chidambaram is known for taking bold decisions. His stint as finance minister during 2004-2008 steered India through the turbulent waters of the global financial meltdown.
Can the finance minister replicate his earlier feat? There’s no doubt that the task is a daunting one given India’s vastly altered eco-political dynamic since 2004. However, there are favorable auguries. Soon after taking over, the minister put out a statement to assuage global and domestic investors and restore their confidence. The markets also cheered his takeover with the Sensex surging and the rupee strengthening marginally against the dollar.
Chidambaram has moved expeditiously, sending out an unambiguous signal that he means business. He has fleshed out a detailed roadmap to augment the country’s investment climate and fiscal consolidation with 'honesty' and 'credibility' as its cornerstones.
The minister knows that the key to restart the growth engine is to build a more conducive investment climate, thereby attracting more capital from domestic and foreign investors. The aim, he says, “is to remove the perceived difficulties in doing business in India, including fears about undue regulatory burden or regulatory over-reach.”
The broad aim, financial analysts say, is to allay fears about the country’s economic health and assure disenchanted investors that the India growth story is still very much alive. Chidambaram has repeated that his focus will be on addressing policy deficits in four vital areas— investor confidence, inflation, widening fiscal deficit and a yawning current account deficit.
Rejuvenating key sectors such as roads, power and energy, speeding up disinvestment and resuscitating the capital markets and moderating inflation in the medium term are also a part of the minister’s strategy.
Analysts predict that while the new minister will need some time to settle in (he was until recently home minister), at least the immediate impact of an improved global perception about the Indian government’s nonchalance will be corrected.
“Chidambaram understands the larger architecture of international financial regimes and regulators. He balances old-school wisdom with an understanding of modern business and regulators,” says a finance ministry source.
But more importantly, the minister’s thinking is in consonance with his boss. “We think alike. We are on the same wavelength,” Singh recently said about Chidambaram. The duo’s convergence of ideas and thoughts will probably will certainly facilitate decision-making and help in the everyday conduct of business considering that Mukherjee who rarely saw eye-to-eye with Singh on several important economic issues.
For instance, the contentious retrospective tax on foreign companies that acquired assets in India and the General Anti-Avoidance Rules that empower tax department officials to probe past corporate deals, were cleared by Mukherjee over Singh’s reservations.
Chidambaram has acknowledged there are problems. “Price stability is an important objective. There has been pressure on prices, and inflation, especially food inflation, is high. The causes are well known…some are beyond our control, such as prices of crude oil and imported commodities, but some others can be addressed by determined action. We will take steps to remove the constraints on the supply side,” he said in his first press conference after taking over July 31.
However, there is hope that with his past record as finance minister, Chidambaram may well be the lift that a depressed Indian economy is looking for. Before taking on his current responsibility, the minister clearly told the prime minister that he would accept his new post only if he is empowered to take tough decisions. Whether or not the minister’s `tough decisions’ will translate into tangible gains for the Indian economy is something that still remains to be seen.
(Neeta Lal is a New Delhi-based journalist. She can be reached at firstname.lastname@example.org)