The new finance minister has quite a task cut out for him. But it is a strange mix ? the near-term ones are perhaps easier to deal with, the medium-term ones much tougher. Success in the near-term will be measured by his ability to lift investor sentiment and buoy asset prices. It is not such a difficult thing to do, given that while across the world prices are coming off high levels, in India they are close to rock bottom. Eternal optimism is the hallmark of all equity markets, and good initiatives of the government will stir expectations positively.

The pre-conditions do exist. Even if the GDP numbers fell short of what this columnist had averred last fortnight, India is still about the fastest growing economy, bar China. On the external front, as predicted, the current account balance did come in at a positive $1.4 billion. But is a current account surplus good for a developing economy? It is, because, along with monetary stability, it improves the confidence of foreigners to do business in India. As a result, you get more capital and business opportunities flowing in. Many economists may not realise it, but people don?t like doing business with paupers. In the first months of the current fiscal, FDI inflows have registered a healthy rise, on top of the record $4 bn inflow last fiscal. Portfolio inflows have also improved in the last fortnight, with over $10 mn coming in every day.

Buoyancy in asset prices is about the fastest way to raise investor sentiment, and coming on top of reasonably strong economic conditions, it will not be a short-lived hallucination. It will improve the ability of companies to tap capital markets and finance capital expenditure, besides strengthening the balance sheets of financial intermediaries, including banks, and make it easier for the government to privatise its commercial undertakings. To achieve this outcome, the government must convey the perception that it will resolutely push the reform agenda, opt for stability and simplicity in tax structures that reward compliance, and abstain from trying to micro-manage banking and other financial processes.

The difficult part is reform in government finance. What needs to be done is known: witness the report of the PM?s Economic Advisory Council, for one. Talk must yield to action. Over the past seven years, fiscal stabilisation has received many cosmetic makeovers, while being eaten away from the bottom by the bane of unreconstructed expenditures. How rarely is it noted that the combined fiscal deficit of the government system, including the losses of the electricity boards, which stand today at over 12 per cent of GDP, is as much as 5 percentage points higher than it was in 1996? Spare a thought as to just how much growth has thus been lost.

Reasonably efficient markets require functional states, which pre-condition is rarely delivered where public finances are in distress. The salvation of government finances does not lie in the tax route, much as the inertia of the establishment would like to have it. There is no option but to restructure expenditures, slash the unproductive and fortify the necessary; to aggressively privatise and use the proceeds to pay down debt. The difficulty of fixing government finances is compounded by the involvement of state governments, and they are under greater strain. The centre has to lead from the front, and the path it chooses must be credible, heading towards a satisfactory resolution in the medium term. Prudence on current finances alone will not suffice, as the legacies of past procrastination will need to be settled.

It is a difficult task, but one that the government has to be seen to be doing. What the new finance minister does will sculpt both the short-term impact on investor sentiment, and the likelihood of fiscal stabilisation materialising in the medium-term. Over the past four years, India has executed profound changes in her foreign policy, to her considerable advantage. One hopes that success would similarly attend on the minister?s new charge, and robust economic growth would return ? the only way to put more real money into the citizen?s hands.

Saumitra Chaudhuri is economic advisor to ICRA (Investment Information and Credit Rating Agency) and editor of Money and Finance, the ICRA bulletin