PM’s step into FM’s role laudable but risky

But they question how much time he can devote to the economy now that domestic security and relations with neighbour Pakistan are top of the political agenda following the attacks last week that killed more than 180 people.

That risks blunting India’s reaction to the world’s biggest financial storm in decades and puts greater emphasis on the central bank to lead the policy charge.

“The focus will be on security, money comes after that,” said Saumitra Chaudhuri, a member of the Prime Minister’s economic advisory council.

The Prime Minister, Manmohan Singh, took on the extra portfolio so that the finance minister can take over the home ministry, where the incumbent resigned to take responsibility for the response to the Mumbai attacks.

But Singh’s decision is being criticised because of the risks the economy faces from a global financial downturn that has already knocked a fifth off the value of the rupee against the dollar and more than half off the main Mumbai stock market.

“An economy the size of India needs a full-time finance minister, more so because of the health of the economy now,” said Yashwant Sinha, a former finance minister and an opposition lawmaker.

An editorial in the Business Standard, a leading financial newspaper, raised similar concerns:

“As laudable as Dr. Singh’s willingness to extend himself is, the economy would be better off with a full-time finance minister,” it said.

RISKS TO GROWTH

Economic growth is expected to slow this fiscal year to 7 per cent from an average of 9 per cent over the last three years as the global downturn bites.

Such an outcome would still keep growth for this year above the 6 per cent level widely regarded as the minimum rate needed to absorb millions of people entering the workforce.

But, underlining the risks posed by the global downturn, many private economists say growth could fall below 6 per cent in 2009/10, slowing down the rate of job creation.

That makes the finance minister’s key role of organising India’s notoriously sluggish bureaucracy on economic issues even more critical now, said former finance minister Sinha.

“You need to be quick in your responses and particularly so in these times of crisis. I don’t think the PM will have that kind of time because of his other responsibilities,” he said.

Like elsewhere, Indian policymakers have taken several steps to shield the world’s 12th biggest economy from the financial storm, including duty cuts, slashing interest rates and banks’ reserve requirements.

Many governments globally have shifted focus to fiscal stimulus to support their economies through the crisis, but India’s fiscal firepower is limited by an already hefty federal and state deficit.

To be sure, the Reserve Bank of India is already playing a central role in supporting the economy from the crisis.

It has slashed its benchmark repo rate by 150 basis points to 7.5 per cent since mid-October and has cut bank reserve requirements by 350 basis points to put more cash into the banking system.

The Reserve Bank is widely expected to cut rates again soon to boost sagging investor confidence, which took a further knock from the militant attacks.

“The economic challenges are more in the area of monetary policy, that’s why the burden will now shift to the Reserve Bank of India rather than the finance ministry,” D.H. Pai Panandikar, president of private think-tank RPG Foundation.

DIFFICULT YEAR, FEW CHOICES

Attacking two luxury hotels used by local and visiting business executives and targetting foreigners were widely seen by analysts and the media as attempts to undermine India’s growing economic and diplomatic clout.

With such a heavy workload, Panandikar said Singh would lean heavily on two close aides, Planning Commission Deputy Chairman Montek Singh Ahluwalia and former chief of his Economic Advisory Council, C. Rangarajan.

Singh resisted the temptation to name one of the two men as finance minister because neither belonged to his ruling Congress party. Naming them could have riled senior colleagues ahead of parliamentary elections due by May in a party known for its factional bickering.

With elections around the corner and newspapers daily reporting popular anger over a series of bombings and gun attacks, Singh’s top priority will be internal security.

“The economy was undergoing a slowdown and the RBI is incrementally reacting to this,” said Indranil Pan, chief economist at Mumbai-based Kotak Mahindra Bank.

“With our fiscal policy already loose in this fiscal year and heading into elections (a) further fiscal push may not be seen immediately … attention has shifted to something that is totally non-economic.”