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Chidambaram needs a herculean effort to pull the economy from the brink

Written by: Sunil Fernandes
Updated: Wednesday, August 1, 2012, 9:39 [IST]

PC needs a herculean effort to pull the economy from brink

From handling an occasional internal strife (like Assam) as Home Minister, P Chidambaram is back as Finance Minister to handle an economy that has gone wonky and figures that are increasingly looking scary. Perhaps, equating Home Ministry with Finance is not right, but the task at hand for P Chidambaram is herculean. The Finance Minister needs to do a daring act like Houdini to push economic growth rates which are at a nine year low; stem the record low of the rupee; reduce the record current account deficit; tame inflation and ensure that the fiscal deficit is within sustainable limits.

Here's what P Chidambaram needs to do, to get a teetering economy, back on its feet.

Curb fiscal deficit

On the day of announcement that P Chidambaram would once again handle Finance, the fiscal deficit figures for the first quarter of 2013 were out. The deficit for the first quarter ending June 2013, has touched 37.5% of budget estimates for 2013.

Clearly, the government is unlikely to maintain the fiscal deficit at 5.1%, as estimated in the Union Budget 2012-2013. Chidambaram would have to do more to reign in the fiscal deficit. He would have to look at reducing subsidies, by first hiking subsidised fuel prices including diesel, LPG and Kerosene. This would perhaps go a long way in sustaining the fiscal deficit at acceptable levels. A reduction in fiscal deficit would automatically help the RBI in reducing repo rates and hence interest rates.

Push reforms like FDI in multi brand retail, pension reforms bill, goods and services tax and the direct tax code

A host of reforms have been pending - some due to policy paralysis and most due to objection from plucky allies. Chidambaram would have to push through the reforms agenda by talking to difficult allies and by also addressing bureaucratic hurdles. Unless he unleashes a fresh set of reforms, it's difficult to see why India's sovereign rating would not be downgraded by international rating agencies.

Address supply side issues to inflation

With inflation at elevated levels, it's unlikely that the RBI would cut rates. One reason for inflation is the supply side bottlenecks that the country faces. Chidambaram would have to start addressing the issue to help reduce the elevated levels of inflation in the economy. He would have to ensure that investment in the economy picks up, so supply side issues are taken care off, which would go a long way in reducing inflation.

Teetering infrastructure, especially power sector needs an impetus

On Tuesday, half of India was in darkness as a few of the nation's power grids collapsed, due to overload. Infrastructure is woeful and foreign players are unwilling to invest in the sector, due to bureaucratic hurdles, land acquisition issues and lethargic attitude of approving agencies.

Chidambaram has to give a big push to infrastructure, otherwise its possible that growth rates in the economy would suffer. Infrastructure has long been neglected by the government. If the economy has to get back on its feet, infrastructure has to propel it.

Boost exports to help the rupee and the current account deficit

Chidambaram has to help exporters push exports, especially since software exports are falling. New sops need to be provided. India's current account deficit figures look frightening and exports could help in curbing the deficit. Infact, if the current account deficit continues to remain at elevated levels, it could pose a serious challenge to the rupee.

Clearly, efforts are needed on all fronts. Chidambaram has to initiate a new set of reforms, push growth, reduce inflation, curb the twin deficits and push infrastructure reforms - a herculean effort indeed.

GoodReturns.in

Story first published:  Wednesday, August 1, 2012, 9:36 [IST]
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