Uppermost in my mind,said new Union Finance Minister P. Chidambaram in his first statement to the media after returning to his former office in the west wing of the North Block,is the duty to regain the confidence of all stakeholders and,he assured us,policies would be modified or fine-tuned in order to meet the expectations of different stakeholders.
In a statement marked by the kind of clarity of thinking one always associates with Chidambaram,the FM has set out his priorities for the remainder of the financial year. Hopefully,his walk will reinforce the talk and this will not just help regain confidence and meet the expectations of different stakeholders,but will in fact have the effect of altering their expectations.
The policy challenge before the Manmohan Singh government is not just one of regaining the confidence of various stakeholders or of meeting their expectations. Rather,it is one of reversing the current state of very negative expectations and restoring trust in the latent potential of the so-called India Growth Story. Ups and downs are par for the course and very much a feature of the Indian growth process.
Unlike Chinas growth story,which has been built on the strategy of creating excess supply,the Indian growth story has been built on the strategy of responding to incentives generated by excess demand. Which is why a certain degree of inflation is built into the Indian growth process. When that demand is not forthcoming from economic agents,the government has to step in periodically to generate demand. The governments inability to do so in the past two years has been part of the problem and it is this constraint that Prime Minister Manmohan Singh sought to ease by seeking to stimulate the animal spirits of private enterprise. It is this challenge that Chidambaram has identified as his first priority in office.
The various macroeconomic indicators and policy variables that the FM mentioned in his statement,namely the savings and investment rates,the current account deficit,the exchange rate of the rupee,the rate of inflation and the revenue and expenditure numbers are all the byproducts of the extant state of negative expectations that need to be reversed.
There was a recognition of this reality as India entered the new year in January 2012. In his New Years message the PM outlined the multiple challenges India was facing and sought support for policies aimed at addressing them. The government raised hopes that a forward-looking Union budget statement would outline the agenda when it decided to shift the budget presentation date to mid-March,a week after the results of the Uttar Pradesh assembly elections would be known. Alas,that was not to be. The budget speech and the initiatives outlined by former FM Pranab Mukherjee not only failed to meet those expectations,but in fact decidedly turned them even more negative.
Indias sovereign credit ratings downgrade was just one more indicator of the negative expectations that had come to shape the dark mood of business. New Delhis overactive rumour mill has it that the PMs sudden decision to name Chidambaram as FM was aimed at preventing a further ratings downgrade. This is not factually correct since PM Singh was clear in his mind that India needs a full-time finance minister and would get one. The timing was linked to the timetable of the vice presidents election and the decision on who would succeed Chidambaram in home.
The FMs statement is an honest account of Indias current economic strengths and weaknesses. It also sets out the governments priorities with respect to fiscal consolidation,investment promotion and inflation management. It correctly states that the key to restart the growth engine is to attract more investment,both from domestic investors and foreign investors. Indeed,few foreign investors will return to India till Indian investors do so. In 2010-11,outward foreign direct investment (FDI),that is investment made abroad by Indian investors,went up sharply,and was almost three times the level in 2009-10. In 2011-12,the boardroom talk across the country has been about exploring investment opportunities outside India. Till Indian businesses signal their return to India,one cannot expect foreign businesses to do so. For this reason,the overwhelmingly positive response of Indian investors to Chidambarams appointment and his statement,signals the beginning of a new mood.
This mood will have to be nurtured and sustained. That,however,is not an easy task. The political constraints under which the Manmohan Singh government has been functioning this past year have eased,but not fully disappeared. While the political space for the government has opened up,thanks to a series of recent developments including the turn that the Anna Hazare movement has taken,the confusion within the BJP and the compulsions of UPA allies and friends to stay the course,the Congress is not yet willing to extend unstinted support to the governments economic policymakers for what they feel should be done.
Which is probably why there is one fudge in the FMs statement,and that is on the issue of energy prices. The FM has cleverly kept the focus on supply side solutions without adequately emphasising the need to raise energy prices. The most important policy initiative that will enhance Indias energy and economic security will be a return to the long-delayed timetable for market-based pricing of energy,especially diesel and kerosene. This and the reduction of fertiliser and other subsidies will have to be part of the fiscal stabilisation strategy. Concerns about inflation,especially in the context of this years drought,reduced the margin for policy manoeuvre. But the government has to bite the bullet. The FM could have initiated a national debate on the issue by posing the challenge more starkly in his statement.
However,the important thing about Chidambarams statement this week is that it sets the stage for a more forward-looking policy strategy and ends the long summer of policy paralysis in the Union finance ministry.
The writer is director for geo-economics and strategy,International Institute for Strategic Studies,and honorary senior fellow,Centre for Policy Research,Delhi