The first statement of intent from new govt

The first statement of intent from new govt
The Financial Express, July 3, 2009, Page 4

Indranil Pan

The annual report card for the economy indicated definite strains to the economy as a result of the global economic crisis. However, it also points out the rosier side. The hope that the Economic Survey raises is that the inherent strengths of India are many and these can ultimately help mitigate the adverse impact of the global downturn. Though the deepest period of the crisis indicated demand as the constraining factor for the Indian industry, the services sector was relatively healthy. Also, the scaling up of rural development programs including the NREGS has enabled the rural consumption demand to stay on the stronger side. Added to this is the fiscal stimulus, mainly in terms of the 6th Pay Commission awards and the lower interest rates by RBI that buffered any fall in consumption demand.

This Economic Survey could be read as the first statement of intent of the new government, the direction to the management of the economy that can be expected from the short-term perspective of the Union Budget announcement on July 6 and also the long-term challenges to restore back the high growth path for the Indian economy over the next 5 year period. Unlike the fire-fighting skill of the last government, the skills of the present government would lie in the management of the economy so as to ensure the sustainability of the “green shoots” in India and maintain investor confidence.

In this sense, the tight rope walk would be to manage the stimulus process in the short term and time the removal of accommodation of monetary and fiscal stimuli suitably so as to ensure a process of medium-term consolidation. The Economic Survey lays out these challenges clearly when it indicates that the Budget Deficit should return to around 3% of GDP at the earliest, roll back interest rate cuts as the economy revives and also drain out the excess cash to curb inflation.

The Survey lays out the reform orientation needed to ensure that the economy returns to a high growth path. Though difficult to implement all in the immediate Budget exercise, the intent seems clear. The plan is to revitalise the disinvestment process to net Rs 25,000 crore each year. Further the government is expected to set-up a road map to reform the subsidies segment to reduce leakages and ensure proper targeting. And lastly, the goal would be to converge various schemes with a thrust on quality of expenditures and outcomes. The Economic Survey also indicates the need to broaden the long-term debt market by liberalising the investment norms of insurance and pension funds, development of credit enhancement institutions and also tax incentives for long-term debt market. The introduction of repos and derivatives in corporate debt is under consideration. This will go a long way to ease the funding problems for India Inc, especially for infrastructure development.

The writer is chief economist, Kotak Mahindra Bank.