Wrong answer

Finance ministry proposes token austerity measures. The solution,as always,lies in reform

Finance ministry proposes token austerity measures. The solution,as always,lies in reform

When the rupee was tipped over the edge by the crisis in Greece,Pranab Mukherjee announced impending austerity measures. But in his usual candid manner,he had indicated that the move should not be taken too seriously. It would be done only to convey a signal that we are responding to the situation. In other words,the measures would be political rather than economic and amount to a reassuring statement of intent rather than meaningful action. The proposals doing the rounds on Friday live up to the promise. None of them is a bed of nails. The government will only freeze transport purchases,reduce foreign travel and cease to enrich five-star hotels by hosting meetings on their premises. Thats just a blip on the radar,whose sweep otherwise reveals a government as sessile as a sea-cucumber.

Mukherjee has not tried to delude us. He had said that his measures might be unpopular but would not amount to hitting the panic button. However,neither do they amount to a solution to a crisis that has been developing for months. The situation is so fragile that it took only the possibility of turmoil in Europe to spark off a serious dip in currency and markets,in an economy which is still partly insulated from external forces. While the government is generally in denial,C. Rangarajan,chairman of the Prime Ministers Economic Advisory Council,has articulated the widely perceived need to encourage capital inflows and reforms. India has drawn sharp criticism from the business community for its refusal to accept that the past is history. The dispute over Vodafone,in which tax laws were altered with retrospective effect,has alarmed foreign investors,who regard it as whimsical behaviour which violates a basic premise of the law a contract is ruled by current statutes,not future legislation. They expect host governments to cushion them against such uncertainties,rather than exposing them to risk.

In addition,the government has faced heavy weather in piloting key legislation geared towards investment,like that on FDI in retail. It has spent beyond its means on welfare,tried to duck the question of inflation and has enjoyed no success in reining in fuel prices. Meanwhile,the RBI has run out of options for shielding the rupee,whose free fall urged Mukherjee to consider the austerity measures. However,austerities do not hold the answer,unless we take them to the epic scale of the rishis and munis of scripture. The answer,as always,lies in reform.