BRING­ING IN­DIA BACK FROM THE PRECIPICE, JUST ABOUT

Apart from restor­ing the cred­i­bil­ity of the fis­cal and CAD num­bers, Chi­dambaram’s big­gest con­tri­bu­tion was in get­ting projects back on track and push­ing some re­forms

The Financial Express - - FRONT PAGE - SU­NIL JAIN

When P Chi­dambara m took guard again at the fi­nance min­istry 17 months ago, af­ter an event­ful stint in the home min­istry, the fis­cal deficit was run­ning at a mam­moth 7.3% of GDP and most were look­ing at a 6-6.5% num­ber for the full year; the cur­rent ac­count deficit (CAD) was an em­bar­rass­ing 5% of GDP — it touched a life-time high of 6.7% the next quar­ter. In short, with GDP growth at 5.2%, and a lot more projects stalled than those be­ing an­nounced, the econ­omy was in the grips of deep pes­simism, fu­elled by the then fi­nance min­is­ter’s ill-ad­vised GAAR pro­pos­als and the ret­ro­spec­tive Voda­fone amend­ment that sought to undo a Supreme Court verdict in the telco’s favour.

While GDP growth is worse at 4.8% and there are few vis­i­ble green shoots, the mood is a lot bet­ter to­day. Not just be­cause elec­tions are in the air, but at 1.2% of GDP, Q2FY14’s CAD looks un­der con­trol, on track to be $50-55bn for the year as com­pared to FY13’s $88bn; and given FY13’s deficit per­for­mance, even though the deficit is cur­rently run­ning at 8%, few doubt Chi­dambaram’s abil­ity to stick to his 4.8% tar­get.

To a cer­tain ex­tent, it is true, the fis­cal cor­rec­tion has an el­e­ment of ar­ti­fi­cial­ity to it since the cuts have been on the eas­ier cap­i­tal spend­ing and R1.4 lakh crore of ex­pen­di­ture that should rightly have been ac­counted for has sim­ply been put off to next year.

Im­pres­sive as the num­bers are, Chi­dambaram’s real con­tri­bu­tion, how­ever, goes be­yond them, and lies in his pow­er­ful lead­er­ship and the push­ing of in­vest­ment and other projects with un­abated fer­vour — given that the health and com­merce min­istries were both op­pos­ing My­lan’s $1.8bn takeover of Agila Spe­cial­i­ties, for in­stance, it was a tough job to en­sure the in­vest­ment got cleared. He was also one of the key play­ers in get­ting the com­merce min­istry to clean up the fine print that kept away FDI in multi-brand re­tail, and in get­ting the tele­com min­istry to agree to lower base prices for spec­trum auc­tions. He has, though, been un­suc­cess­ful in get­ting pow­er­ful coal and oil min­istries on board for the year’s dis­in­vest­ment pro­pos­als and could likely see a R70,00080,000 crore short­fall in rev­enues, ne­ces­si­tat­ing a more sav­age cut in cap­i­tal spend­ing.

It hasn’t helped that — this ap­plies to the ru­pee’s de­cline es­pe­cially — apart from the high rel­a­tive in­fla­tion in In­dia, the dol­lar’s strength­en­ing en­sured all cur­ren­cies col­lapsed, the South African rand and the Brazil­ian real be­ing good ex­am­ples of how emerg­ing mar­ket cur­ren­cies got af­fected. And the con­tin­ued weak­ness in global growth en­sured In­dia’s ex­ports re­mained low — for­tu­nately, given US growth num­bers and the EU’s re­vival, the fear of stag­na­tion in 2014 looks like a thing of the past.

While ex­perts crit­i­cised Chi­dambaram for crack­ing down on gold im­ports by hik­ing im­port du­ties dra­mat­i­cally, to 10% in Au­gust, the suc­cess of this pol­icy can be seen in gold im­ports col­laps­ing from a high of 338 tonnes in the June quar­ter to a mere 85 tonnes in the Septem­ber quar­ter. A smart choice for the RBI gov­er­nor, and some smart moves from him, en­sured In­dia got an un­ex­pected $34bn in NRI and other in­flows within a few months and the ru­pee, which looked like touch­ing 70 to the dol­lar a few months ago, ended the year at around R62. With­out look­ing too in­ter­ven­tion­ist, a ma­jor macro in­sta­bil­ity that would also have taken down large parts of the highly lev­er­aged — and in dol­lars at that — In­dia Inc with it was tack­led with rel­a­tive calm. It is true, of course, that the col­laps­ing econ­omy helped since coal im­ports, for in­stance, dropped dra­mat­i­cally.

Chi­dambaram’s big­gest suc­cess, though the re­sults of this are yet to be felt in ter ms of over­all eco­nomic growth, has been the cre­ation of the Cab­i­net Com­mit­tee on In­vest­ment. The panel, in the last year, has en­sured 123 projects en­tail­ing in­vest­ments of R4 lakh crore have been cleared. Some part of this is ex­ag­ger­ated since the largest share of this com­prises power projects that were not get­ting coal from Coal In­dia which has now been di­rected to sign fuel sup­ply agree­ments (FSAs) with them, but few doubt progress has been made. Whether th­ese cleared projects will trans­late into in­vest­ment on the ground, of course, re­mains to be seen since many of the projects were con­ceived in hap­pier times and may not even be vi­able to­day. And merely di­rect­ing Coal In­dia to sign FSAs may not mean much since its pro­duc­tion ca­pac­ity is sus­pect and the FSAs have low lev­els of penalty for non-sup­ply.

In sec­tors like oil, where there is a pal­pa­ble im­prove­ment in in­vestor sen­ti­ments of late, Chi­dambaram was ably as­sisted by oil min­is­ter Veer­appa Moily. Not only did Moily man­age to push a small but reg­u­lar monthly diesel price hike of 50 paise, he also cleared a pol­icy of con­tin­u­ous ex­plo­ration that has re­sulted in eight rea­son­able dis­cov­er­ies so far — the Ran­gara­jan for­mula for hik­ing gas prices, and a bank guar­an­tee so­lu­tion for Re­liance In­dus­tries (RIL), has en­sured ex­plo­ration in­vest­ment is once again on track. Be­tween just RIL and Cairn, $8-9 bil­lion of in­vest­ments have been com­mit­ted.

While in­vestors were up­set that Chi­dambaram did not re­verse the ret­ro­spec­tive Voda­fone tax, he struck a happy medium by keep­ing the dis­cus­sion open-ended. Mean­while, he has re­moved fears of an ad­ver­sar­ial tax ad­min­is­tra­tion caused by re­lax­ing GAAR and brought safe har­bour rules for com­pa­nies to avoid in­tru­sive trans­fer pric­ing au­dit. His big tax re­for ms — DTC and GST — how­ever, have made lit­tle head­way.

De­spite this, the sta­tis­tics, whether of in­di­vid­ual items like the IIP or of con­sump­tion and in­vest­ment, are not flat­ter­ing — GDP growth in H2FY13 was 4.75% ver­sus 5.5% in the same pe­riod of the pre­vi­ous year and in­fla­tion is look­ing sticky. Iron­i­cally, the sharp ex­pen­di­ture cuts needed to stick to the fis­cal deficit ‘red line’ will make growth prospects worse — this, and the high in­fla­tion, were prob­a­bly the two big­gest causes for the Congress’ per­for­mance in the re­cent state elec­tions. In­dia’s prob­lems need struc­tural re­forms — to make in­dus­try more com­pet­i­tive, for in­stance — but Chi­dambaram can take pride in know­ing things would have been a lot worse had be not taken up the new chal­lenge.

ILLUSTRATION: SHYAM

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