Performance of the UPA-II that navigated the country with minimal damage through minefields of global recession, possible deflationary spiral and worst monsoon rains in 37 years would have got a high rating, but for the high food inflation and stalled financial sector reforms.
Policymakers and independent analysts awaiting the economic growth data of March quarter before making any conclusive remarks about the strength of the recovery unanimously agree that deft handling of fiscal and monetary levers boosted the flagging economy.
Country?s chief statistician Pronab Sen maintains that traction of recovery can be assessed only after looking at fourth quarter GDP data for last fiscal. He argues that manufacturing segments? record performance in recent months could be on account of inventory build-up and the capex projects coming back on stream rather than new investments. ?We have to factor in the impact of the Euro zone crisis on India, if any,? said Sen adding ?if risk aversion remains high globally, the government needs to take a relook at the policy measures needed to achieve 9% growth?. With one of the widest fiscal gaps, the government now has little headroom for announcing another round of stimulus measures if the sovereign default crisis spreads to larger economies.
The fiscal boost given by the government to the flagging economy last year had pushed the fiscal gap to a 16-year-high of 6.8%, which rating agencies flagged as unsustainable. ?If three legs of Greece are chopped off so is one of ours? said DK Joshi, principal economist at credit ratings agency Crisil. He said the pain of fiscal deficit is felt by India too though not as much as Greece.
With the windfall gains from auction of 3G airwaves set to help Pranab Mukherjee?s thrust on fiscal consolidation, deficit for the year is likely to stay below the 5.5% target even if the crude prices shoot up and disinvestment target is not met.
With foreign and domestic investors buying into the India growth story under UPA-II, the benchmark equity indices saw the sharpest rally in 100 days after formation of any central government in independent India . The buoyant markets helped the government in achieving record disinvestment proceeds of Rs 23,500 crore. While retail participation in the stake sale in government-owned companies were dismal, it helped in overriding the deficit scenario. The recent pullout of foreign investors in light of the risk aversion may exacerbate the current account deficit which is now 4%, the highest in country?s history.
Independent economists point out the high inflationary scenario is the single macro theme that can derail the UPA-II?s projection. ?In the long run, if the prices keep going up all the high growth projections will go awry,? said Jehangir Aziz, chief economist at financial services firm JP Morgan Chase. Aziz advocates a sharp hike in the policy rates will keep growth on track in the long term although it will shave off couple of points from growth projections in the short term.
Unlike its earliest avatar, UPA-II had to bear the burnt of global turmoil right from Day One. While it is entering the second year, dark clouds of sovereign default crisis, inflationary tendencies that refuse to subside and chances of another disrupted monsoon rain is looming large in Asia?s third largest economies horizon.