With a poor show at the Uttar Pradesh elections and an inconsequential tally of seats, the Congress party is now even weaker than it was. This means, the UPA government that it leads will find it difficult to push through reforms; it was already unable to get even less important Bills tabled and discussed in Parliament and now it is up against a stronger Opposition. So big ticket policy changes can be ruled out whether it?s the land acquisition Bill or increasing the FDI limit in insurance. What?s worse is that the government may now come up with more populist schemes with an eye on the Lok Sabha elections scheduled for 2014 that will further drain the exchequer. It may not control subsidies to the extent needed. So while it may promise fiscal consolidation, promising to rein in the fiscal deficit to say 5% of GDP next year, it?s hard to believe this government is capable of discipline. After saying it would borrow R4.3 lakh crore this year, it has already picked up over R5 lakh crore. The private sector should be prepared to keep coughing up high interest rates.
What a pity because this could have been a time when the Indian economy could have matched the growth of China or even surpassed it. China has pared its growth estimates for 2012 to 7.5% after looking for 8% in the last seven years. Instead, we have frittered away an opportunity so that the economy is actually decelerating with GDP expected to clock barely 7% in 2012-13. Non-food credit growth has slowed to just above 15% when it should have been 18% plus. Meanwhile, in China the government has trimmed reserve requirements for banks twice in three months and lending at the country?s four biggest banks has risen sharply since the start of the year. ICBC, for instance, has upped loan by 15 billion yuan in two months to166 billion yuan. China is targeting an inflation of 4% this year. Here the RBI is unable to cut policy rates because although inflation may have eased to 6.5%, there?s every chance it could average 7% in 2012 if crude oil prices remain at current levels of $124 per barrel.
Both the manufacturing and the services PMIs for India slipped a little in February reversing the jump in January. China?s PMI moved up to 51 in February, with the production index at a nine-month high. Clearly, little seems to be changing on the ground in India and it?s because the government continues to spend mindlessly on schemes such as rural employment that are vulnerable to leakages. While constantly upping the minimum support price, the government hasn?t mustered the courage to control subsidies Moreover, it has altogether failed to push through policy reforms and create a friendly environment so that private sector companies can go ahead with capital expenditure plans. Gross fixed capital formation, in the country, contracted 1.2% y-o-y to R4.3 lakh crore in the three months to December, 2011. China may want to cut back on investment but the idea is to rejig the economy so that it is less dependent on exports.
It wants greater emphasis on the quality of its growth rather than just the pace. China has always surpassed its growth targets in recent years, it looks like India will underperform even the modest goals that are being set.