Friday, Oct 07, 2022

Next steps

Five measures the finance minister could take to make things better.

Five measures the finance minister could take to make things better.

Finance Minister P. Chidambaram acknowledges the necessity of taking steps to restore confidence in the economy. He has a difficult task ahead. When he was brought back as finance minister,the markets demonstrated their faith in him and surged,hoping to see reform and a return to the path of investment and growth. But the slow and increasingly paralysed UPA did not deliver on the much-needed reforms that could restore investment. The government’s interference in the rupee market and its attempts to defend it have only made matters worse.

What should the finance minister do next? A crucial element of his strategy should be to win back the confidence of the market himself,as a pro-reform leader. This is important,because,by all accounts,the change in the perceptions about a leader seen as one of the few liberals in the UPA was the last straw for foreign investors who had been clinging to hopes of higher growth in India. From the menu of options before him to restore confidence in the India growth story,Chidambaram can pick five things to do.

One,he can announce measures that address long-term growth,such as the problems of coal and iron ore imports,as those are among the main causes of the deterioration of the current account deficit. But the credibility of his cabinet colleagues is a constraint and sentiment is unlikely to change much with these. Two,he can stop trying to prevent rupee depreciation,as that is almost the only adjustment mechanism in place for the correction in the current account deficit. Three,he can reverse the restrictions on the currency market so that the impact of a negative sentiment is smaller. The RBI has taken a number of steps to reduce the size of the INR derivatives markets. As a consequence,the impact of a billion dollars of rupee sales is much bigger than when the market was larger. Four,Chidambaram can reverse all the retrograde restrictions on imports that his government and the RBI have taken in the last one month. When Manmohan Singh faced an exchange rate crisis in 1991,he went in exactly the opposite direction than that taken by Chidambaram. Liberalising imports,including those of gold,removing quantitative restrictions and letting the rupee float were bold steps,and they delivered economic growth and a stable rupee. Five,he should persuade Sebi and the RBI to remove all restrictions on rupee denominated debt. Today,the caps imposed on these are fully utilised. These are low risk for India as the currency exposure is held by foreigners. Ultimately,there are no short cuts available,but these would be steps in the right direction.

Subscriber Only Stories
UPSC Key-October 7, 2022: Why you should read ‘Avalanches’ or  ‘Virtual W...Premium
Blunt criticism of Russian Army signals new challenge for PutinPremium
‘If I did not explore art, my life would remain unfulfilled’: Lalu Prasad...Premium
On Budget review eve, macro worries are back amid global recession fearsPremium

First published on: 29-08-2013 at 04:27:09 am
Next Story

Sukhbir wants Istanbul model of rapid transport in cities

Latest Comment
Post Comment
Read Comments