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
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.