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It’s a Tall Order

Can PM Manmohan Singh bring in the economic rejuvenation that is long awaited?

There is much optimism in the air, on occasions bordering on euphoria, about the fact that Prime Minister, Dr Manmohan Singh, has taken charge of the Finance Ministry after Pranab Mukherjee. There is a view that the much-delayed, so-called “second generation” of economic reforms will now take place which will result in a significant revival of the Indian economy. What is argued here is that such expectations are unrealistic and that strategies proposed by the PM may not bring about the kind of economic rejuvenation that is being talked about. On the contrary, the series of economic crises confronting India could even deepen in a hostile external environment where the double-dip of the Great Recession across the globe is no longer a matter of speculation, but stark reality.

Since taking over as Finance Minister, Dr Singh has emphasised on five key challenges. These are controlling the fiscal deficit, achieving clarity on tax matters, reviving the mutual funds and insurance industries, clearing a backlog of foreign investment proposals and expediting the completion of major infrastructure projects. “We want the world to know that India treats everyone fairly and reasonably and there will be no arbitrariness in tax matters,” said Dr Singh. His statement was widely interpreted to mean that the IT Department would either completely stall or go slow in imposing capital gains tax on Vodafone (for acquiring companies abroad in tax havens resulting in a change in the control over assets in India with the aim of avoiding taxes) for which a “clarificatory amendment” was made in the law with retrospective effect. What had earlier been done by Mr Mukherjee was to delay the implementation of a general anti-avoidance rule (GAAR) and shift the burden of proof of tax avoidance by overseas corporate entities to the revenue authorities.

Although Dr Singh’s recent statements are aimed at assuaging foreign investors, what is significant is not what he said but, what he did not state. Among the various challenges, he excluded the key economic challenge his government faces: controlling inflation. Nor did he talk about the need to create more jobs. Importantly, he did not mention the need to expedite the process of arriving at a consensus with different state governments on a common goods and services tax that would unite India’s fragmented market. What the PM did obliquely acknowledge were the difficulties in achieving this goal.

Also significant is the fact that the PM did not say anything about going ahead with the Cabinet’s decision to allow FDIs in multi-brand retail outlets. Forget the Trinamool Congress or the Left, what is evident is that there is no consensus within the ruling Congress party itself that the likes of Walmart will ensure that the country’s farmers receive higher prices for their crops while consumers also pay lower prices — it’s as simple as that. On the contrary, there is widespread apprehension that foreign investors in multi-brand retail will eventually destroy the livelihoods of millions of small retailers.

On hiking the foreign investment cap in insurance and allowing private and foreign players in pension funds or the investments by Coca-Cola and IKEA, these decisions may be welcomed by a few but hardly touch the lives of the proverbial aam aadmi. The PM and his confidantes often talk of the need to cut the fiscal deficit by, among other things, paring subsidies such as subsidies on diesel. The point is that even if one believes that a lower fiscal deficit will curb inflationary expectations in the medium and long run, a cut in diesel subsidies by increasing the prices of the most widely-used petroleum product would have a direct and immediate impact on inflation (even if it is a one-time impact) which, in turn, would certainly not make the government more popular.

Dr Singh added, “It is necessary that we change the discourse from a critique of an open economy to a critique of what is needed to make an open economy work better for the welfare of the people.” But his critics contend that the problem is not so much on account of the absence of market-friendly reforms but because of reforms themselves.