Ok, now can we get cracking on the crisis in the economy

The slush that defined the politics of nomination is, hopefully, behind us. Thanks to the callisthenic dexterity of the Samajwadi Party to execute a U-turn in the cramped political space of less than 24 hours. Pranab Mukherjee, we take it, will be the next President of India. We are also done with the gushing. The show is over—unless the NDA rediscovers its script—and it is time the UPA got on with the business of governing.

For weeks now, India had been put on pause mode as the political hierarchies hatched ways to refurbish their relevance. In these weeks, we were informed, the GDP touched a nine-year low, industrial output is virtually stagnant, the rupee is threatening to find a new nadir and inflation is rising again. All that was offered in terms of solace were new committees. Action stations seem deserted as yet. Even the normally conservative and quiet Azim Premji declared India suffers from the “lack of leadership”.

To the average man on the street and the experts, the economy seems on the throes of a serious crisis. Those in government, however, seem to suffer from contextual autism. On Friday night, Kaushik Basu, who is the chief economic adviser to the government of India, tweeted a link to his latest column. The thrust: “Let us not overreact.” Juxtapose the facts with this advice. GDP has been sliding for 24 months, inflation as per a Cabinet note averaged 14.5 per cent since 2009, interest rates have doubled since January 2010, rupee has crashed 25 per cent in 12 months, current account deficit has widened to 4.3 per cent and that India’s rating could sink from investment to junk grade.

Is the outrage on the economy really an overreaction? Basu argues that “the first fallacy is to live by extrapolation and to deduce from the above trend (of sliding GDP) that we will keep going down. If economic variables always moved in trend, India would not have grown by 8.4 per cent in 2009-10”. Fair enough. But the economy turned around in 2009 because the fundamentals were better and the government stepped on the plate to intervene. So the first fallacy is about “extrapolation” but from a different perspective. Economic variables will move in trend unless there is political intervention. If we must not “overreact”, then government must react.

The nomination of Mukherjee as president and the virtual eviction of the TMC afford the Congress elbowroom to renegotiate the terms of trade on governance. To start with, the discourse needs to move away from micro details—the tried and tired, shop-worn arguments on subsidies, MNREGA or FDI in retail—to the big picture. Yes, there is trouble in Europe but India’s crisis is home-spun.

The cause of the slowdown is located in the fundamentals of the economy. India spends far in excess of its income. Between 2004 and 2012, its income rose four times while its borrowings shot up 10 times. It does not earn enough dollars in exports to pay for its imports. The twin deficits have led to higher inflation and devaluation of the rupee. Failure to dismantle permission raj has brought down investment, savings and growth.

The first step to redemption is to balance the budget, cut fiscal deficit and curb borrowings to tame inflation and bring down interest rates. Disinvestment is no longer an option but a necessity. Sure, there will be political resistance but not if management control remains with the government. Why not create a holding company, put all PSU shares in it and offer it as an exchange traded fund? If listed abroad, it can create foreign exchange inflows and help stabilise the rupee. Alternately, the government can offer individual PSU stocks to Indians. The untapped wealth in PSUs is enormous; two decades after liberalisation, the government is the largest business house. Just LIC and the group of insurance companies will be worth over $120 billion and a 20 per cent offering can deliver around $20 billion or over `1 lakh crore. Simultaneously, it must auction natural resources to raise resources to cut borrowings so that interest rates come down.

On the external front, it must curb imports, particularly of gold. On fertilisers, it could allow Indian companies to set up plants in locales like Qatar where energy is cheap, deem these as virtual SEZs and allow duty free import. To curb gold import, the government must introduce a scheme where people can surrender physical gold—no questions asked—for bonds. This gold can be offered in the domestic market to curb both imports and prices. 

Finally, the government must work to spur investment to generate employment and boost consumption for GDP growth. India must build on its domestic opportunity. Indian companies are sitting on investible cash of over `1.5 lakh crore. Investments worth over $100 billion are stalled, thanks to pending legislation. Why should the Centre reinvent every wheel? For instance, on land acquisitions, why not use the models, say from Gujarat or Haryana or wherever. The crisis also is an opportunity to dismantle the permission raj. If you want to set up a power plant, you need 100 clearances from six ministries at the Centre and the state. Why should this be so?

This is the last window of opportunity before poll season for the UPA to redeem itself. The formula is simple: cut deficit, lower interest rates, curb imports, shore up investment. India cannot afford to wait for the UPA to find a crisis to solve every problem. India will survive and thrive but history will not forgive the regime that denied India for want of gumption.

 The opinions expressed in this column are the author’s own