Ground realities may hurt Chidambaram's agenda

NEW DELHI Fri Aug 10, 2012 4:00pm IST

1 of 2. Finance Minister Palaniappan Chidambaram speaks during a news conference in New Delhi February 29, 2008.

Credit: Reuters/B Mathur/Files

NEW DELHI (Reuters) - The return of a pro-market reformer to India's finance ministry has cheered investors and contributed to a market rally, but Palaniappan Chidambaram will need both political deftness and some luck to tackle the problems dragging the economy down.

Faced with impatient financial markets and the threat that India's credit rating could be cut to junk, Chidambaram has wasted no time since moving into his old ministry last week.

He has ordered a review of retrospective tax rules that had panicked foreign investors and sidelined officials behind those rules. And, in his first public comments, the Harvard-educated former lawyer vowed to fill a gaping hole in the budget and ease the burden of high interest rates on consumers.

(Also read: BREAKINGVIEWS: India begins the post-Mukherjee clear-up, click here)

In what is perhaps testament to his nimble media management, newspapers have somehow got wind of new early-morning starts and long hours for officials at the previously laid-back ministry.

During his last stint at finance, Chidambaram oversaw India's fastest growth surge in the past two decades that helped steer the economy through the worst of the global financial crisis. But this time, Chidambaram's task is more daunting.

Industrial output has fallen from year-earlier levels in three out of the last four months, and a summer drought has triggered a slew of cuts in growth forecasts, with economists predicting this year's economic expansion as low as 5.4 percent, the worst in a decade.

He also inherits the political constraints that stymied his predecessor Pranab Mukherjee's efforts to push major reforms.

Bills that would bring crucial financial-sector reforms were removed from the agenda of the current parliament session because Prime Minister Manmohan Singh failed to win support for them from coalition allies and even some in his own party.

Efforts to allow foreign supermarkets to set up in India have also run into opposition because, although such a step would ease supply-side bottlenecks in an inflation-plagued economy, political parties fear it would cost jobs - and votes.

"Things are easier said than done in India," says Robert Prior-Wandesforde, an economist with Credit Suisse in Singapore, referring to New Delhi's repeated reneging on promises.

"Rather than promising and running the risk of not delivering. I would like to see him delivering, then talking."

FISCAL TEST

To help him deliver, Chidambaram may appoint former International Monetary Fund Chief Economist Raghuram Rajan as his chief economic adviser. Rajan, currently a professor at Chicago University's Booth School of Business, is credited for predicting the 2008 global financial crisis and is a vocal critic of New Delhi's populist policies.

The new minister's biggest test will be controlling the fiscal deficit, which overshot a target of 4.6 percent of GDP by 1.2 percentage points in 2011/12 due to slowing growth and increased spending on fuel and fertiliser subsidies.

India's sovereign credit rating is at risk because of the high fiscal deficit, whose funding from domestic savings is crowding out private investment and lowering growth prospects.

However, a drought due to disappointing monsoon rains will push the government to spend more on relief for farmers. Rural demand for cheap fuel to drive irrigation pumps and tractors has further delayed a promised increase in subsidised diesel prices, which the government concedes is vital to fixing the deficit.

Privately, finance ministry officials warn a lack of action on subsidies could push the deficit to 6 percent of GDP this fiscal year, above the government's target of 5.1 percent.

"Without addressing the issue of fuel subsidies, fiscal consolidation is not possible," a senior official at the Finance Ministry said, adding that the budgeted fuel subsidy bill of 436 billion rupees would nearly double if prices are not raised.

To ease the pressure, Chidambaram is looking at shoring up revenues through more efficient tax collections, the auction of cancelled second-generation mobile phone licences and sales of stakes in state-run firms. But that may not be enough.

Tax revenues are under pressure from the economic slowdown. Plans to raise 300 billion rupees through partial privatisations this year have gone nowhere so far and much will depend on how equity markets perform.

Chidambaram's best hope is a bonanza from an auction of mobile airwaves, which could fetch more than the budgeted 400 billion rupees.

"The government will have to rely on the disinvestment programme and the proceeds from the spectrum auction for overall fiscal management. If they are good, overall fiscal slippage can be contained within a reasonable limit," said Siddhartha Sanyal, an economist at Barclays Capital in Mumbai.

A failure to check the deficit would make it tougher for the minister to convince the Reserve Bank of India (RBI) to lower interest rates further. The RBI has left rates steady for two straight reviews, asking the government to do its bit to revive the economy.

But Jagannadham Thunuguntla, head of research at SMC Investments and Advisors Ltd., says further economic deceleration could force a re-think at the RBI.

"We are worrying about peripherals. We are forgetting the epicenter. Epicenter is growth, growth and growth," he said.

(Additional reporting by Manoj Kumar; Editing by John Chalmers and Neil Fullick)

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Comments (3)
kplkgm wrote:
While reeling under severe drought and power shortage, We could not burden the people with new levies or enhancing the existing ones. The prices have already gone up by 25 to 30% without any increase in the tangible income of the middle class eroding the purchasing power and consumption. It is an open invitation to sluggishness-recession. Pruning of (unproductive) subsidies and non planning expenditures may help to some extent.New deposit schemes to mop up funds from public may also be considered. We could think of measures to levy new taxes only after successfully tackling the problem of drought and power shortage.

Aug 10, 2012 5:44pm IST  --  Report as abuse
rneelamarya wrote:
now the situation is extremely complex. many economic legislation are pending as the government is not getting the support. issue of environment , labour laws, mining, power are in limbo. the demand for fuel is ever rising and the subsidies culture is eroding the growth. while some one thinks of beginning,immediately it reaches to an end. perhaps the situation will remain like this only when the economy goes to the bottom of the wave and then it would start rising. ould fighhobust growth some precautions were required but these were not taken. but now allaround there is slow down and india can grow on the back of US, china and europe and its economy is supplementary to China and it is never commplementary. for two years government and political parties should understand the lapses and it is the time all the chief ministers show sincerety towards development. UP, Punjab are not sincere towards development and every on

Aug 10, 2012 7:10pm IST  --  Report as abuse
kpvidya1999 wrote:
Fiscal deficit control means nothing in the absence of growth. A govt which has a “fake” economist as the PM cannot do anything. Subsidised fuel and aggressive promotion of private vehicles has completely lopsided the cost of vehicle ownership. A country which was growing on 2 wheelers has suddenly become a car/SUV driven country. Personal vehicle ownership must be high periced and subsidies should never come in the way. Similarly LPG costs are to be freed. Pay differential for BPL families for limited qty. (BPL families may land up selling the cylinders to others and pocket the differential). Let actual costs prevail and let market forces address supply and demand. But taxes on lpg and petro stuff should be reduced to bare minimum both at centre and in states. Rogue states such as bihar and UP who contribute crap to indian economy should be broken into smaller units and managed better. PC can do the following… Cut full subsidy on all items. Remove free supply of electricity to employees and farmers. Hammer subba row to reduce interest (maybe too late). Cut parliament expenditure .. no trips. Get a new railway minister who will make the railways pay profits to the government. If I were the PM, and not being a “fake economist” like Basu, Monty and the PM.. I would have seen the writing on the wall long back and taken action. These worthies are to be shunned by PC.

Aug 10, 2012 9:11am IST  --  Report as abuse
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