IIP data confirms the bad news. Finance ministry must show urgency to revamp and reform
The latest IIP data confirms that industrial growth on a year-on-year basis hovered at near-zero levels in April and May. This is worse than the much-disdained Hindu rate of growth of 3.5 per cent per year that prevailed in the days of socialism. It is a striking indictment of the UPA that it now presides over conditions akin to the 1960s and 1970s,when leftist policies had seriously imperilled Indias growth.
Ever since Pranab Mukherjee stepped out of the ministry of finance,some space appears to have opened up for a restarting of the economic policy process. But weeks have already gone by without any visible new action. The key priorities must be to,first of all,rebuild a high-capability team,and not just at the finance ministry. Then,attention must be focused on reviving the rupee,which has collapsed because foreign investors are jittery. Taxation of international finance must be put on a new level of clarity and good sense much like the OECD countries have done in order to calm the fears of foreign investors. While a reversal of the Vodafone tax proposal will require a herculean effort,given that the tax department has once again rejected Vodafones petition,the prime ministers best bet is to clear the air on GAAR,if not put it in abeyance for some more time. Alongside this,replicating the rules for FIIs on equity for rupee-denominated bonds will open up a second highway for foreign capital inflows. Pulling back on subsidies will help in reducing the current account deficit,which hasnt been as bad in decades thanks to unrestricted government spending that saw public sector savings collapse from 5 per cent of the GDP in 2007-08 to 1.7 per cent in 2010-11. Lower funds availability,and a dramatic slowing of clearances for India Incs projects led to a collapse in investments the capital goods sub-index in the IIP has contracted by 14 per cent in April and May. A focused and concerted move involving the PMO,the ministry of finance and the Planning Commission is required to get government infrastructure projects off the ground again.
There are many who believe that moving slowly and doing no harm until a new finance minister comes in is good enough. But that may be a luxury India cannot afford. Once the economy slips further,it will become even more difficult to pull it out of the recession. There is no alternative to urgent action.