Basu hears the tiger roar in 7 Race Course Road
The prospect of facing the next Lok Sabha elections with a limp economy and furious voters might force the government's pace on reforms. Time is tight. But the economy's need and the ruling party's political interest are aligned. That was chief economic adviser Kaushik Basu's optimistic reading of the government's thinking following the Congress party staring down its troublesome ally, the Trinamool Congress, over the ruling coalition's choice of nominee for President.
And while the rating agencies' mood is turning from sombre to dark, the CEA's assessment of the government's resolve on reforms changed from 'pretty sure' to 'very sure' in the course of an hour-long Q&A at the Foreign Correspondents Club in Delhi on Monday.
Though Basu termed the Reserve Bank's decision to keep interest rates unchanged as 'maturity' despite the Finance Minister's hint to focus on growth, he seemed disappointed. A rate cut would have been a signal, he said, that India preferred growth and could live with inflation. (Wholesale and consumer price inflation is high. Much of it is on account of food inflation that does not respond easily to high interest rates. Inflation in manufactured products while high is easing. Devices like interest rates are not efficient instruments and can kill growth. A man without a job cannot eat low inflation!)
Both the RBI and top leadership of the government are agreed that borrowing - or the fiscal deficit- must be cut or oriented towards infrastructure investment. Reducing fuel subsidies is the most important. Basu did not favour decontrol of diesel. Instead, he said its price should float. A fixed subsidy per litre should be given, which would remain stable within a band of international prices. (This would also bring in private players, who might pare some of the cost padding that state-owned oil marketing companies are suspected to indulge in).
With crude prices falling, this is just the moment to attempt such a reform measure.
Foreign direct investment in retailing requires no change in the law and should be allowed. Farmers are supportive, Basu said. Small producers would also be, when they realize that they can become export-worthy as foreign retailers helped upgrade the quality of their supplies.
Basu said India was still structurally sound. Despite slowing growth, it has maintained its GDP growth ranking among the emerging economies. Last year's foreign direct investment of $48 billion was the highest so far.
By voting for staying in the Eurozone the Greeks had provided a breather. But the respite would be temporary because the pain of staying in will fall disproportionately on the poor, which would give rise to social tension and political pressure to renege on the austerity commitments. And in 2014, Europe's debtor nations would have to pay up 1.3 trillion euros in short-term loans. That would further crimp the world economy.
So rather than bark at bullets it was time for the government to bite them.
More about Vivian FernandesVivian Fernandes is a senior journalist with nearly 30 years of practice, 19 of them in television, all of which he spent at TV18. Vivian’s last assignment was as executive editor of a book on India and China written by the founder of the Network 18 group, Mr Raghav Bahl. He has been an observer of Indian business and politics, and had reported on economic policy making as reporter, chief of Delhi bureau of correspondents and economic policy editor. Vivian has traveled abroad with Prime Ministers Narasimha Rao, Atal Behari Vajpayee and Manmohan Singh. He was also reported on the World Trade Organization’s trade talks from Cancun, Hong Kong and Geneva. He continues his association with the Network18 group, but not as an employee.
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