As India heads into 2013, the question uppermost in everybody’s mind is: will the economy revive during the year? Finance Minister P Chidambaram, for one, is optimistic. Green shoots of recovery, he has said, are now visible. The first indication was the 16-month record growth of 8.2 per cent in the index of industrial production, or IIP, in November. The Reserve Bank of India has indicated that it could bring down interest rates in January when its reviews its monetary policy next as core inflation eased to 4.5 per cent in November, a 32-month low. The Cabinet has approved the proposal to set up a Cabinet Committee on Investment, or CCI, that will see how to restart large projects (those with an investment of Rs 1,000 crore or more) stuck over issues like land acquisition, environment clearances or raw material linkages.
Global investors are enthused about the liberalization steps taken by the government, especially in retail and civil aviation. The government has taken some hard measures to rein in its fiscal deficit – mainly, raising the diesel prices and capping at six the number of subsidized cooking gas cylinders a household can get in a year – which will, in all likelihood, avert the crisis that may have been caused by India’s sovereign rating being relegated to junk.
There’s a strong reason for the Manmohan Singh government to pump life into the economy as quickly as possible. The United Progressive Alliance cannot allow the economic gloom, caused by low growth, to linger for long because the general elections will be held in 2014. There is heavy-duty speculation that in the coming budget, the government could offer sops that will raise disposable income. That will improve consumer spending and benefit sectors like automobile, consumer electronics et cetera. That could have some cascading effect on the economy.
On the flip side, will the government prune the subsidy bill further? Stung by innumerable controversies, the United Progressive Alliance has to do all it can to get voters on its side. Already, there is tremendous pressure from within the alliance to raise the cap on subsidized cooking gas from six cylinders to nine cylinders. However, it may move a large chunk of the subsidy to the bank accounts of the poor, which will help check pilferage and misappropriation. At the highest levels, there is also serious discussion on food security (read subsidized food) for the poor as well as free medicine in government dispensaries and hospitals. The impact on the government’s deficit could be severe. More pressure could come on the deficit from the lackluster auction of airwaves (2G spectrum) to telecom companies and below-target disinvestment.
The other factor that could roil the party is the continued slowdown in the United States and Eurozone. Experts expect the Eurozone recession to continue in 2013. With about a week to go for the year to end, the United States is approaching tax increases, spending cuts and a reduction in its budget deficit starting 2013, popularly called the ‘fiscal cliff’.
Are the green shoots that Chidambaram talked of strong enough to put the country back on the growth track? It may not be sufficient. The government has revised its growth target for this financial year from 7.6 per cent to 5.7-5.9 per cent. Growth in the first half has been 5.4 per cent. To meet the new target, the economy will have to grow 6-6.2 per cent in the second half. That surely looks a tall order. Much will depend on Chidambaram’s largesse in the budget for 2013-14. Pre-election budgets are always full of pleasant surprises.