No quick fixes to India’s growth problems
(Any opinions expressed here are those of the author and not of Thomson Reuters)
Over the past year, the government has silenced its critics with several pro-reform policy initiatives including the relaxation of FDI norms, freeing FII debt investment limits and a calibrated deregulation of petroleum prices. These reforms were cheered by the markets by way of increased FII inflows.
India’s widening twin deficits – fiscal and trade – appeared to have been reined in. But in the first few months of the fiscal year 2013-14, everything seems to have come undone for India – be it the potential end of the U.S. Federal Reserve’s quantitative easing policy or the dollar’s appreciation against emerging market currencies.
Incremental policy measures such as gold import restrictions did not have the desired impact. Has the policy catalyst been introduced too late? Can we blame global macro developments as inhibiters in India’s march towards prosperity?
Liquidity tightening measures by the RBI did little to stabilize the rupee but increased volatility in the bond markets by causing yields to rise across the curve and put India’s economic growth in jeopardy.
Subsequent corrective measures by the central bank to infuse liquidity by way of open market operations did bring down yields from a decade’s high but were counterproductive for a depreciating rupee.
These topsy-turvy policy swings have put the spotlight on the central bank and its efforts to provide a stable and conducive macro environment that would revitalize growth and check inflation. In the meantime, Finance Minister P. Chidambaram has been trying to comfort the market and global investors by referring to the undervaluation of the rupee and the government’s intention to curtail fiscal deficit at 4.8 percent and the trade deficit at 3.7 percent for FY14.
Earlier, the government had chided the central bank for focusing only on inflation; currency stability and economic growth were important too. Is the government getting consumed in its efforts to play the role of a catalyst to economic growth?
What could revive interest in the India story? Some quick fixes – such as a substantial increase in diesel prices to offset subsidy, reduced fiscal and trade deficit numbers for the next two quarters, steps to augment forex reserves through sovereign bonds – could help. But in the medium- to long-term, steps to improve exports, steps to ease and facilitate FDI investments and steps to augment infrastructure will provide a long- lasting solution.
Some pro-growth policy announcements from the highly regarded and newly appointed RBI Governor Raghuram Rajan could also be a near-term sentiment booster for the markets. The manifestos of major political parties, heading into an election year, would provide some clues to the collective economic intelligence of our politicians. This could then set the stage for the next five years and beyond.