Unprovoked optimism

When all else fails, try to talk up the economy. That seems to have become Finance Minister Yashwant Sinha's motto after he and his gover...

When all else fails, try to talk up the economy. That seems to have become Finance Minister Yashwant Sinha8217;s motto after he and his government finished doing all in their power to send it into a tailspin. To the extent that economic expectations have a way of fulfilling themselves by determining investment and other decisions, the minister could be right to project good cheer when there seems no apparent reason for it. But the answer to his assertion that the economy will look up from September, on improved second-quarter figures and impending government initiatives, is another cliche: the proof of the pudding is in the eating. So far, the country has no reason at all to trust Sinha8217;s judgment.

True, industrial growth has shown the faintest revival, but it is nowhere near strong or sustained enough to give cause for optimism. As for government action, there is little to show except quick clearance to pending foreign investment proposals and the faintest glimmerings of action on counter-guarantees forso-called fast-track power projects. It is true that if anything could revive the seriously sagging economy, it would be determined government action to stimulate investment. Yet the portends are not good.

Reform is not on the agenda. Inflation, as predicted after Sinha8217;s reckless Budget, is growing at an alarming rate. The rupee has lost a fifth of its value in two years and is now depreciating rather quickly. Both trends make for higher interest rates, hardly what the economy needs to hear. Foreign institutional investors have resumed being net sellers. Exports are actually falling. In the global sense, the Indian economy is not doing any worse because it is still relatively shielded from the world economy. The rupee is showing greater signs of moving in tandem with Asian currencies, yes. This may be necessary too for exports, but exports are only one sector albeit a crucial one. It does not make for bullish sentiment on the economy as a whole.

In policy terms much the greater leeway for stimulationwould have come from earlier prudent macro-economic management. A looser monetary and fiscal policy 8212; low interest rates and stepped-up government spending 8212; would have been possible in this hour of near-crisis if earlier prudence had kept inflation and the fiscal deficit in check. That is manifestly not the case.

Expenditure management never took off under the UF government and things have not improved since. Increased spending can only mean a gaping deficit and disaster on the inflation front. That the government will go ahead with its disinvestment in four public-sector undertakings without waiting for the market to pick up are brave words, but they better reflect the BJP8217;s economic illiteracy than any likelihood of this jolting a somnolent market.

India8217;s ill-conceived divestment programme has been a disaster in far better market conditions. There is no reason to think that it will do anything now to boost the economy. The world economic environment, the BJP8217;s blunders, and the bad macro-economicmanagement of some years 8212; not necessarily in that order 8212; have brought India to this pass. This government does not seem up to getting it out of this mess. Even sparing the country further policy disasters would be something to be thankful for.