Economic Outlook 2008

Written by N K Singh | Updated: Dec 30 2007, 03:49am hrs
The year 2007 will gladden the hearts of economic policy makers. The year ends on a high note of continued economic buoyancy, daunting GDP indicators, modest inflation, and India remaining a favourite destination in the boardrooms of multinational companies. It is legitimate that the current policy managers take credit for these many favourable outcomes. It is another matter that many view the current growth to be on auto pilot. Mumbai is believed to have decoupled from Delhi and there is palpable absence of significant policy initiatives. The comment that why tamper when things are going well suggests complacency and can at best be comforting in the short term.

So how do we sustain this trend in 2008

First and foremost, a reassertion of Prime Ministerial authority. There is a growing perception both nationally and internationally, of a weakening of the Prime Ministerial writ on coalition partners, many of whom have increasingly begun to believe and behave as if they were governments in themselves. The tardiness in the award of contracts for the prestigious road projects or the mess in the decision making on spectrum allocation are anecdotal examples. Given his unimpeachable integrity a reassertion of Prime Ministerial authority could qualitatively alter perceptions and improve governance quality.

Second, a continuation of strong macro fundamentals. Compliance to the quantitative targets under the FRBM Act may have been achieved but as is well known there are significant under recoveries from the petroleum sector. There is also under provisioning for the fertilizers subsidy. Besides, the food subsidy bill will continue to rise. The inevitable impact of these on consumers need to be gradually calibrated notwithstanding its inevitable fiscal and inflationary implications, to avoid a land landing. Looking at global shortfalls in food production due to unfavourable climate and land diversion to bio-fuels, international food prices in the medium term may remain high and protecting the poor would entail rising subsidy bills. The revamping of Public Distribution System thus assumes urgency.

Similarly, managing the exchange rate which does not further cripple export competitiveness without excessive restrictions on capital inflows or access to cheaper borrowings by medium and smaller enterprises, while minimising losses from unabated sterilisation, remains a difficult balancing act.

Third, the governments flexibility in dealing with the Left parties may have been severely dented by the outcome of recent state elections but will this mean totally abandoning the legislative agenda Chidambaram himself confessed at the recent World Economic Forum summit in Delhi that action in the financial sector namely banking, insurance and pension was disappointing and hoped that even in the balance period of this government progress was possible. We need to encourage him to move in this direction. Incidentally incorporating them yet again in budget announcement is pointless because they have been said earlier but implementation remain mired in coalition politics. So between the Prime Minister and himself a negotiating strategy is necessary to transit from this stalemate. This of course raises the larger issue of reactivating action in many stalled areas because no credible government can remain in a holding mode or lame-duck state for the balance 14 months on its remaining tenure.

Fourth, the pace and quality of public expenditure remains worrisome. Infrastructure projects in general are lagging behind with clear evidence of cost and time overruns. Public-private partnership is still in a nascent phase. Chidambaram has been wary about the efficiency of public delivery systems and project implementation. We are overloading the state apparatus and more so at the district level with projects that are ill-equipped to cope. Ask any diligent district official and he will not be able to truthfully recount the number of development projects he is expected to oversee. Each year we add more projects but subtract none. While increased public outlays for infrastructure and social sector will remain inescapable, dependence on the traditional machinery for project implementation needs a basic rethink. We need to learn from better international examples. Increasing reliance on civil society and NGOs can ameliorate the situation, but we need to think beyond them.

Finally, budget making would have just commenced. Those who expect election in the near term believe that this would be a populist budget. Others looking at the current political configuration, expect the government to last its full term and the forthcoming budget may be the penultimate one. Irrespective of this government must redeem its many unfulfilled promises. Announcing more populist schemes or a large provision for additional emoluments of public servants can cripple the fiscal health nurtured carefully. There is ample evidence that new projects take time; the leads and lags are significant.

The electoral gains from many populist measures to the party in office remain questionable. Completing the unfinished tax reform agenda, putting in place mechanisms to better monitor public outlays and numbers of small steps to improve the cost and competitiveness of the Indian economy will have a more lasting value.

Notwithstanding exogenous risks, 2008 can build on the economic momentum of 2007. Only time will tell if government rises to these challenges. In the meantime, wishing my readers a Happy New Year.

The author is a former bureaucrat. These are his personal views