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| March 05, 2007 | Monday | Safar 15, 1428 |
Economic reforms under cloud
GIVEN the fact that Indian Finance Minister P. Chidambaram was under intense pressure from various quarters — pro-reformers, status quoists, anti-liberalisers, industrialists and business groups, the Left parties, the Right supporters, etc — he did a rather excellent balancing act in his budget proposals, submitted to the Parliament last week.
Unfortunately for Chidambaram, budget-day was preceded by a rather harrowing experience for the Congress, which heads the United Progressive Alliance (UPA) government at the centre. The Congress lost elections in two north Indian states — Punjab and Uttarakhand (earlier known as Uttaranchal) — and many in the party and outside rushed to lay the blame on Chidambaram and his finance ministry.
It was argued that the party lost state elections because of inflation, triggered by the continuing emphasis on economic reforms, and the lack of public spending on projects meant for the welfare of the ‘aam aadmi’ (common man), a new cliché that has been mauled ad nauseam by the Congress.
With elections to India’s most important state — Uttar Pradesh — scheduled for next month, there was no possibility of Chidambaram pursuing further economic reforms. The UPA, it must be remembered, crucially depends on the support of the Left parties for survival; the government headed by Prime Minister Manmohan Singh — the other key reformer in the present dispensation — has very limited room for manoeuvring, as the Leftists are opposed to any further deepening of the reforms.-
And the old socialist warriors in the Congress, who have been opposed to the Singh-Chidambaram duo for many years, have suddenly become active, stonewalling several attempts by reformers in the government.
The finance minister is keen that Parliament, in the ongoing budget session, passes two important bills — the Insurance Laws (Amendment) Bill, raising foreign direct investment (FDI) in the sector to 49 per cent from 26; and the Pension Fund Regulatory and Development Authority bill, throwing open the sector to private and international (with a 26 per cent ceiling) players, and allowing funds to invest up to 50 per cent of their corpus in the stock markets.
It is doubtful whether Parliament would give its approval to these two crucial pieces of legislation in the ongoing session. But what is certain is that the anti-reformers in the Congress have stalled other important measures to liberalise the economy, including opening up the retail sector to FDI, encouraging the setting up of special economic zones (SEZs), allowing international universities to set up campuses in India, and rolling back steps such as allowing futures trading in some commodities.
THE finance minister unveiled his budget with a regressive move to ban (hopefully, temporarily) futures trading in wheat and rice. An expert committee will study the impact of futures trading on essential commodities and give its report within two months, to enable the government to take a decision on the contentious issue.
Ironically, just a day earlier, the annual Economic Survey, presented to Parliament, had found nothing wrong with futures trading, and even Agriculture Minister Sharad Pawar had extended his full backing to it. Many farmers had also lent their support to futures trading, though middlemen and other intermediaries, who were worried about the steep fall in margins in spot trading, were not in favour of it.
The chairman of the Forward Markets Commission, S. Sundareshan, was also opposed to any moves to ban futures trading in commodities. But politically, it has become a hot potato, with many Congressmen of a vintage era, and strong votaries of a dirigiste regime, not yet reconciled to modern realities and the functioning of a market economy.
Futures trading in agricultural commodities is a relatively new concept in India that has proved to be extremely popular. The National Commodities and Derivatives Exchange — in which American finance major Goldman Sachs acquired a stake recently — accounts for 95 per cent of all wheat futures traded in India.
India, which is the second-largest producer of wheat and rice, began importing wheat last year to meet a shortfall in production. Electronic futures trading in commodities has brought about a great deal of transparency, and prevented the distortions of the earlier system. But the powerful lobby of traders and other intermediaries, who have lost significantly, have been opposed to this new platform.
In the past, hoarders have made a killing at times of commodity shortages and when prices soared. But with an institutionalised futures market — even the limited one in India, where international funds are not allowed to trade — the traditional traders have taken a beating.
WITH a global rise in commodity prices, inflation has been a worrying factor in India. The Reserve Bank of India (RBI), the country’s central bank, has been monitoring the price situation, and tweaking interest rates to curb inflation.
However, the Economic Survey that was presented last week was rather critical of the RBI’s monetary policy to contain inflation, which was leading to a hardening of interest rates. The survey said a balance needs to be struck between curbing inflation and maintaining a high pace of growth.
Inflation touched a two-year high of 6.73 per cent last month, while gross domestic product (GDP) growth slowed down to 8.6 per cent in the third quarter (ending December 31, 2006), as against 8.9 per cent and 9.2 per cent in the first and second quarters respectively of the current fiscal.
The agriculture sector continues to slow down the economy, and according to the latest figures released last week, expanded by a mere 1.5 per cent — as against 10.7 per cent by the manufacturing sector and 11.6 per cent by the financial services sector.
According to many Congressmen, one of the main factors leading to the party’s defeat in Punjab and Uttarakhand was inflation. But Chidambaram has been defensive about the sensitive subject. He points out that there was a time — in the heydays of socialism in the 1970s — when the country was reconciled to inflation of 10 and 12 per cent; it had even touched the 22 per cent figure on a couple of occasions.
Growth, however, was at a sedate 3.5 per cent (Hindu rate of growth, as a prominent economist had once dubbed it). According to Chidambaram, these days (when growth has topped eight per cent for the last four years) the ‘tolerance level’ for inflation is around five per cent.
But the recent high of 6.73 per cent is nothing exceptional. Just about three years ago, inflation hovered around the six to eight per cent mark. Even during the late 1990s, there were occasions when inflation peaked at eight per cent.
Chidambaram ensured that deficit targets were on track this year. The revenue deficit has been projected to decline to 1.5 per cent of GDP in financial year 2007-08, as against two per cent in the current fiscal (which ends on March 31).
The fiscal deficit is expected to come down to 3.3 per cent of GDP, from 3.7 per cent this year. The primary deficit (which excludes interest payments) is expected to show a positive of 0.2 per cent of GDP in the new financial year.
The worrying aspect in the budget proposals were the hefty increases in spending on some of the UPA’s pet projects. Total outlay on social sectors has been raised from Rs600 billion to over Rs800 billion. There is massive leakage in the implementation of many of these projects, and the actual beneficiaries fail to get the benefits meant for them.
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