Electoral politics to set policy direction
WITH eight of India’s 30 states facing elections in 2013, and national elections due in May 2014, the possibility of the United Progressive Alliance government embarking on bold economic reforms appears bleak.
Consequently, the outlook for the Indian economy in the New Year appears to be mixed, especially with an aggressive opposition led by the BJP determined to stall all attempts to further liberalise the economy.
Of course, the BJP’s approach towards reforms and extending cooperation to the UPA government will depend largely on the fate of assembly elections in four key states, where it will be battling with the Congress for high stakes. New Delhi, Madhya Pradesh and Rajasthan in the north and Karnataka in the south (besides the four small north-eastern states of Meghalaya, Mizoram, Nagaland and Tripura) will be heading for the polls in 2013.
While elections in Karnataka, the only southern state where the BJP is in power, are due in June, the electorate in the other three key states of New Delhi, Madhya Pradesh and Rajasthan will be exercising their franchise towards the end of 2013. The right-wing Hindu party,
which in the past had ruled all three northern states, is in power only in Madhya Pradesh. But it is desperate to emerge victorious in the national capital.
The UPA government has a tenuous hold over power, especially after the Trinamool Congress walked out of the alliance a few months ago; its two outside supporters, the Samajwadi Party and the Bahujan Samaj Party (BSP), are unreliable, though they have helped bail out the government at crucial moments.
But the numbers in both houses of the Indian parliament are not in favour of the UPA pushing ahead with major reforms in 2013. Many within the Congress are also wary of Prime Minister Manmohan Singh taking up new initiatives just a year before general elections. In fact, the government’s move to slash subsidies on cooking gas cylinders has been widely critcised by Congress leaders and there are moves to partially roll-back the withdrawal of subsidies.
Singh faces three major challenges on the economic front: containing inflation, curbing subsidies and narrowing the fiscal deficit, and attracting foreign investments into the infrastructure sector. For the past two years, his government has been battling widespread charges of corruption that had resulted in virtual policy paralysis.
It was only towards the end of 2012 that Singh led from the front, unveiling a series of measures – including slashing fuel subsidies and allowing FDI in multi-brand retail — that have won him plaudits globally. Perhaps his biggest achievement was in dumping Mamata Bannerjee, the Trinamool Congress chief and chief minister of West Bengal, who had crippled the UPA government by obstructing every sensible policy move.
WITH eight state assembly elections in 2013, the government’s window of opportunity to introduce reforms will be severely restricted as the Election Commission imposes curbs on the announcement of new policies. International and domestic investors are also keenly aware that in a year with such a busy election schedule — and on the eve of election year 2014 s— the UPA government has limited room for manoeuvring.
In fact, chances are that the government would be forced to unveil so-called social welfare measures that would only result in widening the fiscal deficit. The Congress is already taking credit for the new direct cash transfer scheme that is being launched from January 1 in 51 districts, covering 10 million households. The scheme envisages transfer of cash, related to 34 existing subsidies, to the bank accounts of the poor beneficiaries.
The government is also being pressured to swiftly introduce the Food Security Act – the bill was introduced in parliament last year and is
currently being studied by a standing committee – before the 2014 elections. This would result in the food subsidy bill ballooning to almost Rs1 trillion, upsetting the government’s plans to limit the fiscal deficit to 5.3 per cent.
The expected focus and the unveiling of high-cost (and obviously wasteful) spending plans on the eve of election year 2014 will dampen sentiments, both in the stock markets and in the general economy. The Reserve Bank of India (RBI), the central bank, has been resisting the government’s efforts to reduce interest rates, citing the threat of inflation and the growing fiscal deficit.
For much of 2012, the finance ministry has been urging the central bank to relax its tight monetary policy by easing rates; the RBI has steadfastly refused to do so, souring ties between the two. Bankers and analysts expect the pressures on the central bank to mount in 2013, as the UPA government does not want to go to the polls in 2014 with consumers complaining about high interest rates for a range of products from housing loans to borrowings against gold.
Business groups and lobbies have also blamed the RBI for the lacklustre growth of the Indian economy over the past two years, claiming that high interest rates have taken a huge toll on business competitiveness, consumer sentiments and manufacturing activities, besides decelerating growth sharply.
THE Indian government has gone in for a downward revision in its growth projections for the current fiscal (ending March 31, 2013). According to its mid-year economic analysis, GDP will expand at between 5.7 per cent and 5.9 per cent in the fiscal, way below the earlier projection of 7.6 per cent. Fiscal 2013-14 might see GDP expand by between 6.5 per cent and seven per cent.
The economy expanded at a brisk 8.5 per cent to nine per cent for much of the UPA government’s tenure since 2004. The average growth
rate during its first term and the first part of its second term was more than eight per cent.
However, the deceleration began after the series of corruption charges against the government paralysed it’s functioning, leading to a downward spiral. International ratings agency Standard & Poor’s warned that the country’s sovereign rating risked being downgraded to junk grade.
S&P now estimates that the Indian economy will grow at 6.5 per cent in 2013. This is on the basis of the recent economic reforms unveiled by the Manmohan Singh government.
Another international rating agency, Moody’s, also notes that India could enjoy a better 2013, thanks to the flurry of reforms following the abandoning of an ‘obstinate coalition partner.’ “The growth prospects have improved with a new finance minister, the withdrawal of an obstinate coalition partner and a flurry of pro-business reforms designed to lift the economy from its funk,” said a Moody’s report. “Business groups are more upbeat; this will translate into better investment and GDP growth, but not until well into 2013.”
The department of economic and social affairs at the UN, in its World Economic Situation and Prospects 2013 report, notes that the Indian economy will grow at 6.1 per cent in 2013 and 6.5 per cent a year later. But it warned that the Indian economy — along with China’s — faced “a number of structural challenges that hamper growth. Given persistent inflationary pressures and large fiscal deficits, the scope for policy stimulus in India and other south Asian countries is limited.”
The Asian Development Bank (ADB) has also cut India’s growth forecast for both the current fiscal and financial year 2013-14. It has slashed the GDP rate to 5.4 per cent (from an earlier projection of 5.6 per cent) for the financial year ending March 31, 2013, and from 6.7 per cent to 6.5 per cent for the next fiscal.