One Year To Go
Fixing a broken economy with an eye on the 2014 elections is a tough call
Hardnews Bureau Delhi
Fixing a broken economy is a difficult business. No one in the world has a clue how to do it. After politicians proved inadequate in Europe, technical experts in the form of economists were brought in to stabilise the pessimistic scenario of relentless crisis, but they fared worse. Keeping in mind the difficult environment, both in India and the world, Union Finance Minister P Chidambaram may have job of dressing up a tough budget to take care of the demands of managing a troubled economy, as well as political expectations in the last budget that the UPA government will be presenting before the 2014 elections. He is surely hoping that the economy may scramble out of the slowdown, and thus will be poised to notch up a healthy growth rate in excess of 6 per cent in the next financial year.
Reading the fine print of the budget papers suggests that this performance will depend largely on a friendly global environment and hefty disinvestment of public sector companies. Indeed, is this budget good enough for the UPA to win the 2014 elections? Among other social and economic indicators, consistent price rise, grassroots flagship programmes, the promise of cash transfer to the poor, and how the economy behaves in the next few months would answer this complex question.
The finance minister rose to present the budget at a time when the growth rate was stuttering to 5 per cent or less, the current account deficit was beyond 4 per cent and the fiscal deficit was sailing above 5.7 per cent. From an economist’s standpoint, there was a need to rein in expenditure and create circumstances in which growth could be triggered to compensate for much that had gone wrong. The Kelkar committee, appointed by the finance ministry, submitted a report last September where it suggested that the economy was on the verge of collapse if the government did not get down to reducing subsidies on oil, food and other sectors. The economy’s survival was linked to taking these urgent steps. Most of these steps were to be taken on the fiscal side.
Quite expectedly, the government began to increase petroleum and diesel prices and slashed planned allocation to various departments of the government. The finance ministry thus managed to trim government expenditure in those areas which were not critical or weresuperfluous. These measures brought about a compression in the economy that resulted in discontent all around. The stalling of growth in various sectors of the economy was also fuelling anger amongst the educated unemployed who suddenly found that they did not have the jobs for which they had been trained.
There has been simmering unhappiness in the huge unorganised sector, which is over 90 per cent of the working class economy. The massive nation-wide two-day trade union strike in February is a pointer of labour unrest stalking vast parts of the industrial sector. Political watchers believe that the enlargement of protests against corruption as well as against the gangrape in Delhi and other parts of the country was also due to India’s mounting problems, plus widespread social and political discontent.
The compression in an economy to control inflation as well as to cut down expenditure has an unintended consequence; it stifles growth. In Europe and elsewhere there is growing realisation that policies of austerity do not work beyond a certain level and cause recession that destroys livelihoods and brings unprecedented misery to the majority of people. Businesses are becoming unviable and unprofitable, leading to increase in non-performing assets of the banks. Jobs are getting lost.
In Europe and elsewhere there is growing realisation that austerity does not work beyond a certain level and causes recession that destroys livelihoods and brings unprecedented misery
Such a claustrophobic compression can be eased off with a calibrated monetary policy, where money supply is enough to sustain businesses and livelihoods. Ever since the slowdown of 2008, central governments have lost control of their Reserve Banks. Invariably, they cannot be persuaded to change their rate of interest to enlarge credit supply in the economy. In India, for more than a year now, despite demands from various sectors of the economy, the Reserve Bank of India (RBI) has not been reducing the rate of interest in the name of controlling inflation. The explanation provided by RBI is that the rate of inflation is still high and it is not in a position to ease the credit policy. This is a fallacious argument as there has been a fall in headline inflation over the last one year.
Also, the decision about monetary policy needs to be taken by an elected government and not by a regulator, who does not have a perspective on what kind of implications his decisions are having on jobs, livelihoods and much else. As some senior government officials claimed, the RBI is more governed by other central bankers like the Bank of England and US’s Federal Reserve rather than what the finance ministry thinks. It is not known, though, what kind of harm RBI’s action has done to the economy.
From this standpoint, Chidambaram was cramped by his inability to do much when it came to the country’s monetary policy. He did his bit to cut down planned outlay in many departments. Tribal affairs and panchayati raj budgets were diminished. Defense barely managed to hang on to its outlay. All the grand plans to acquire weapon systems have been postponed. Flagship programmes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and renewal fund allocations were marginally enhanced.
Taking cognizance of the nation-wide outrage against gender-based violence in the wake of the horrific gangrape in Delhi, he announced a bank run by women, plus a Nirbhaya Foundation with a corpus of Rs 1,000 crore. To mollify angry youth he spoke of skill development and job growth, which has begun to lag. Ironically, economists have begun to talk of a lost generation in India where there will be no jobs for them till the quantum of investment is raised exponentially.
To reiterate the commitment of his government to the poor, Chidambaram announced in Parliament that the cash transfer scheme has begun to benefit the poor and the needy and its net would cover ‘everyone’ before the 2014 elections. Much of UPA’s attempts to come back to power depends on the cash that people get in their hands year after year. Along with MNREGA and cash transfer, these are hefty programmes to improve the lot of the poor. There are also demands to introduce another round of loan waiver to farmers. In the 2009 Lok Sabha elections, the loan waiver and rural employment guarantee scheme helped the Congress and UPA; what needs to be seen is whether the cash transfer scheme will do the magic this time.
The truth is, Chidambaram’s budget is based on difficult assumptions. Its success will depend on a lot of elements and that includes easing of monetary policy and a good monsoon. If some of these aspects work in the finance minister’s favour only then can the UPA use its economic management abilities to seek a fresh mandate.