PC logs out, task undone

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Despite his best intentions, PC was a mere spectator to India’s sagging fortunes

PC logs out, task undone
Economist Arthur Okun used high inflation and unemployment to plot the misery index in American economy.

In India, planning commission member Arun Maira, an old hand at Boston Consulting Group, cited the misery index with 6 per cent inflation and 7 per cent GDP growth as benchmarks.

Given the persistently high inflation, much above 6 per cent in the past two years, and about 5 per cent or lower GDP growth, the average Indian’s misery seems very high, even as the UPA government prepares to wrap up business in its last leg.

When finance minister P Chidambaram takes the mike for the last time in Lok Sabha to present the vote-on-account (who knows, he may return under a different coalition next term, as he once did in the Deve Gowda/Ike Gujral-led United Front regime in the nineties), he will have a lot to explain and defend the government for mismanaging the economy.

Yet, that may not be such an easy task, even if PC, as he is popularly called, resorts to quoting Tamil poet and saint Tiruvalluvar. In Thirukkural written two millennia ago, the great Tamil philosopher condemned a government that “does not discharge its basic responsibilities towards its people.”

Japanese brokerage Nomura that plotted India on a different scale in last August said that India’s misery index has persisted at such a high level for the first time since 1991, when India enacted major economic reforms.

Nomura plotted India’s misery ranking by mapping the gap between the consumer price inflation and industrial production.

Apologists for the government believe that despite his best intentions, PC was a mere spectator to India’s sagging fortunes in the year going by.

On February 28, last year, he said in the course of his budget speech: “It is food inflation that is worrying and we shall take all possible steps to augment the supply side to meet the growing demand for food items.”

Yet, after a year of making that promise, there are few signs of reaching succour to citizens, especially to the weaker sections. Misery, as estimated by Nomura, has only heightened as consumer price inflation continues at an unacceptably high 8.79 per cent, which is a two-year low, and food inflation remains well entrenched at 9.9 per cent, as per the latest January data. Vegetable prices continued to rise at 21.91 per cent last month.

Worse, continuously falling growth in industrial output is pinching pockets hard as income and employment fall. Official data available till December 2013 suggest that industrial growth contracted 0.6 per cent, continuing its negative streak of the past four months.

Sonal Varma, economist at Nomura Financial Advisory and Securities (India), said in a note, “Such economic conditions (high inflation and negative industrial growth) hurt the poorer segments of society much more than the wealthy. It also means a very tough economic environment for policymakers.”

Indeed, the economic environment continues to remain grim for Team Chidambaram as they get ready over the weekend to present an update on the state of economy in the past one year and crystal-gaze on 2014-15 in the vote-on-account.

There is little doubt that the brilliant finance minister that he is, Chidambaram will rustle up several macroeconomic pointers to present a healthy scorecard for the UPA’s last year in office.

Fiscal deficit & CAD

Few expect PC to breach the redlines he drew on twin deficits on fiscal and current accounts. Most fertiliser subsidy payments beyond September 2013 have been either deferred or financed by banks backed by government guarantees. An across-the-board cut in both plan and non-plan expenses adding up to over Rs 1,10,000 crore would also enable the finance minister to present a more acceptable balancesheet of his government. Non-tax revenue accruals through sale of spectrum and forced special dividends from companies with large cash piles like Coal India would help him rein in fiscal deficit at 4.8 per cent or even lower at 4.68 per cent, as some economists predict.

Staggering out defence purchases, especially capital expenditure, is also expected to give him enough elbowroom to sign off in style on the fiscal front.

On the current account side, finance ministry old-timers believe that Chidambaram has been crafty in financing the $75 billion deficit. He has compressed the oil import bill by at least 10 per cent and deferred financing of crude that remains on the balancesheets of state-run oil companies. For instance, Iran continues to press with a bill of over $1.8 billion in unpaid dues against sale of crude oil. A Crisil note suggests that crude oil imports fell by 10.1 per cent in January alone.

PC has also saved precious foreign exchange by tightening the screws on imported gold that fell 38 per cent year-on-year during April-December 2013.

No doubt, the finance minister will seek to occupy high moral ground by claiming to have curbed gold imports through duty hikes. But in doing so, he has certainly looked the other way, while hoards of smuggled gold found their way to the country. In fact, Reserve Bank of India governor Raghuram Rajan warned the government on Monday about a sharper spike in gold smuggling should the import curbs not be eased.

Meanwhile, Chidambaram has had little luck in restraining coal imports that consumed the third biggest chunk of foreign exchange. Research agency OreTeam has estimated that coal imports by India grew 21 per cent to 152 million tonnes in 2013. Such high growth was apparently due to “artificial domestic shortages” created by policy paralysis, scams in coal blocks allocation and restricted output from operating mines.

India emerged the third largest importer of coal behind China and Japan, though its sits on the world’s fifth largest coal reserves, OreTeam pointed out.

Healthy growth in foreign currency borrowings by private companies through the ECB window may also help the government keep its current account deficit within acceptable limits, though FDI inflows have grown modestly and FII investments dipped significantly. FDI inflows in April-December 2013 stood at $20.19 billion against $19.79 billion in the same period a year ago. FIIs, on the other hand, were less keen on the Indian market, investing up to $9.687 billion during the financial year till February 12, against $23.263 billion in the year-ago period.

Chidambaram’s three illustrious predecessors, Yashwant Sinha, Jaswant Singh and Pranab Mukherjee, have also presented interim budgets. In fact, Mukherjee had famously said while presenting his: “It’s (interim budget) a wonderful platform for the government to sell itself.”

But then, Chidambaram does not seem to have much to report about on the government’s achievements, as high inflation, double-digit interest rates and lower than 5 per cent growth continued to rile the economy.

Former RBI deputy governor Subir Gokarn recently said, “Through vote-on-account, the government could say what it would do if elected back to power.”

Finance ministry officials have been hinting that in his last budget speech on Monday, Chidambaram may like to put together the Congress party’s economic agenda before the electorate ahead of this summer’s general election.

Jinxed tax reforms

Even as policy paralysis continued for over six months this financial year, the finance minister’s track record on the much-trumpeted tax reforms may not be worth taking note of. The controversy surrounding the general anti avoidance rules (GAAR) spilled over to this financial year. PC seems to have bought peace with foreign investors by postponing a solution toApril 1, 2016 (April Fool’s Day may be a mere coincidence) on impermissible tax avoidance arrangements entered into by certain multinational companies.

Another major commitment that the finance minister made was to introduce the direct tax code (DTC) bill, incorporating amendments of the standing committee on finance headed by Yashwant Sinha, in Lok Sabha by the end of the last budget session. But then, nothing seems to have worked for the UPA government though the Union cabinet has finalised its views on the Yashwant Sinha panel recommendations on DTC to replace the archaic Income-Tax Act of 1961.

A major tax reform pertaining to a single levy in the form of goods and service tax (GST) has also not moved an inch. Given the UPA government’s fractious mandate and its strained relations with the opposition BJP-led NDA, the constitutional amendment to GST has been derailed. The GST law also needs to be ratified both by the centre and the state governments, for which, the process has not even begun.

Chidambaram himself had floated this concept in his budget speech way back in 2007-08. The cabinet itself has not taken a final view on several pending issues like compensation payable to states on revenue losses and segregation of powers on taxing goods and services, while preserving the federal character of taxation.

Disinvestment & special dividends

Choppy stock markets seem to have restrained the finance minister from going ahead with big disinvestment plans as originally intended. Till date, Chidambaram has barely managed to rake in Rs 5,093 crore through sale of equities in MMTC, Hindustan Copper, NFL, ITDC, NHPC, PowerGrid and STC. This is against the target of Rs 40,000 crore.

Big-ticket divestments in Coal India and BHEL did not materialise owing to bickering with the nodal ministries of coal and heavy industries.

Given the lack of choices, Chidambaram seems to have resorted to his time-tested method of mobilising non-tax revenues by way of forcing state-owned companies to pay special dividends (an euphemism for transfer of cash held by PSUs to the exchequer). Coal India was the first to cough up Rs 16,485 crore as special dividend.

Cross-sale of government equity in state-run companies is yet another method being tried out by the finance minister to put his finances in order.

Budget & politics

Perhaps, the one big boast that the UPA can make about Chidambaram’s budget promise is on food security. Though the campaign is yet to roll out countrywide, the food security bill has been adopted by both Houses of Parliament and is now law. As with the rural job guarantee scheme in the last election, the Congress party will wield the food security promise to garner votes. Still, many analysts point out that the biggest challenge will be implementation of the law by the state governments that have their own food security programmes. For instance, BJP’s Madhya Pradesh government has its own version of food security, through Annapoorna yojana. Similarly, Jayalalithaa’s AIADMK government in Tamil Nadu has rolled out ‘Amma canteens’ that serve fresh cooked food across several cities and towns.

Chidambaram made three promises with huge political overtones in his budget speech of February 28 last year. All three pet promises are, at best, “work in progress.”

The first was to set up the Rs 1,000 crore Nirbhaya Fund to ensure safety for women. This fund was promised after paramedic Nirbhaya was brutally gangraped in Delhi more than a year ago. The fund has been named after her, but the women safety campaign, with all elements in place, is yet to be rolled out.

The second big promise was to impart skills to over a million youth, as part of the UPA’s ‘economic empowerment’ campaign. The National Skills Development Corporation was also set up to commence skills programmes at the centre and in states by involving not-for-profit groups. While the skills development campaign has since been launched, there has been no word from the government on when to reach the million target.

Finally, on behalf of prime minister Manmohan Singh and Congress chairperson Sonia Gandhi, the finance minister promised cash transfer of subsidies directly into bank accounts of beneficiaries. His plan seems to have gone completely haywire, as there are hurdles to subsidy transfers into bank accounts of beneficiaries based on Aadhar numbers, especially in the case of cooking gas. Oil minister Veerappa Moily has put on hold cash transfers for LPG consumers till a review on Aadhar numbers linked to bank accounts is sorted out. Subsidy payments on fertilisers and food through bank accounts have not moved an inch till date.

Mixed bag

Finance ministry officials confide that Chidambaram may still package his achievements carefully when he presents the vote-on-account this Monday, laying more emphasis on what has been done, and ignoring the huge unfinished agenda.

Columbia University professor Arvind Panagariya claimed earlier this week that he did not see enough reforms in the past 10 years. “The new government will have to work to restore confidence of investors,” he said.

The next government — irrespective of whether the Congress party gets a third successive run at governance or not — would have set a humungous economic agenda to restore people’s confidence in the India growth story.


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