The big picture

Besides fiscal projections, the government should fix monetary targets, too, to eliminate conflict of interest
By Mohan Sule

With the biggest democracy in the world kickstarting its five-year cyclical ritual, the economy has come to occupy centerstage. Should the preoccupation with growth be a reason to cheer or is the pushing aside of crony capitalism as the most important issue facing the country a sign that more things appears to change the more they remain the same? As if overjoyed by the renewed sense of importance in the citizens’ mindspace, the broad market benchmarks are scaling new heights despite uncertainty about any political grouping getting a comfortable majority and the specter of an unstable government propped up by regional forces guided by opportunism rather than by ideology. Whatever might be the outcome, there are two inescapable conclusions. The first is the preference for prosperity rather than being bogged down by controversial issues. The second is corruption is not being viewed as a standalone problem though it is considered as a blockage to development. Increasingly, there is recognition of the need for a long-term vision for the country and a package of incentives to achieve the results. The Planning Commission is assigned the role to chart India’s roadmap for the next five years. The primary objective is to assess the current resources including human, raw material and machinery, and capital in meeting the desired objectives. This is a top-down approach, with the finance minister marshalling the tools at his disposal to allocate the necessary finances.

With the opening up of the economy, investment in roads, sea ports, airports, and power generation, clubbed under the sweeping label of infrastructure and till recently the responsibility of the government, is either undertaken as part of public-private initiative or by the private sector on its own. Developers do not have to depend on the treasury to meet their funding. With guidelines framed, land acquisition is to be negotiated by the investor and the owner. Even procurement of natural resources has been left to the discretion of users: some power generators imported coal from Indonesia due to shortages in local supply. The government now acts as a facilitator by expediting clearances and a regulator by monitoring adherence to environmental safeguards and ensuring a fair-playing field. Hence, there should be a rethink on the role of the Plan panel of assigning capacity requirement, particularly for infrastructure projects. Economic indicators should be used to determine if investments are in the right direction and if policy calibration is needed. Like in other industries, overcapacity and non-performing assets should result in consolidation and unlocking of shareholder value.

The Reserve Bank of India uses the benchmark of inflation to guage the health of the economy. Recently, it shifted from the WPI to a more relevant CPI to effect changes in lending rate. The central bank also spells out the comfort level for inflation, which signals impending rate revisions. The finance minister, too, forecasts a fiscal deficit level besides growth rate. These projections are necessary not only for imparting predictability about policies but also to give the market a sense about the indicative route the fiscal and monetary authorities are likely to take to meet them. For instance, it was understood that hiking of import duty on gold was going to be a temporary measure to puncture the ballooning current account deficit and not a reversal in policy. Similarly, the state of fiscal deficit gives a rough idea about the likely course that would be adopted by the government including aggressive PSU divestment, which would have a bearing on supply of paper in the market, and ramp-up in taxes, which would affect consumption. Spurt in government borrowings signals a widening revenue-expenditure gap and heating up of interest rates. What the value of the rupee should be is a debatable issue. Yet, a steep slide is a pointer to the unattractiveness of the country as an investment destination. This would call for dipping into reserves or control on capital outflows. However, the targeting as well as the authority to act to reach the goal posts are divided between the RBI (using interest rates to influence inflation and currency) and the government (using taxes for controlling deficits and growth), leading to conflict of interest. The central bank might want the rupee to finds its own level but the government might want to cap its movement on concerns of costly imports or uncompetitive exports. Hence, there is merit in the suggestion of RBI governor Raghuram Rajan that the government should take up plotting the trajectory for various economic parameters including inflation so that other agencies can accelerate or slow down their efforts to be in step with the big picture.