Reforms Gain Momentum

For the first time in the last few years, the government is being seen to be in a hurry to mend its finances. The reason for such an urgency can be traced back to the rapid worsening of the situation which if not controlled now, will probably create a lot of stress on the economy going forward. Latest numbers put us in the same footing as we were may be a few years back. After clocking a growth rate of 9.4 per cent in the second quarter of 2010, GDP growth rate has dipped to 5.3 per cent in the third quarter of CY12. Other important financial pointers too are not encouraging. Two important indicators; fiscal and current account deficit (CAD) are slipping out of control. The CAD at the end of second quarter of FY13 stands at 5.4% of the GDP, one of the highest in recent years. The gap is so wide that despite an inflow of USD 24.2 billion in FDI and FII during the same period, it just couldn’t be brought under control. We have already seen a few rating agencies cut their outlook on the country’s sovereign ratings until now.

Against this background it has become imperative for the government to bite the bullet and unfold bold reforms in order to contain the gap. Therefore, foreign investments in multi-brand retail, aviation and broadcasting have been allowed so as to facilitate the bringing of more foreign money in the country. Other steps include, increasing diesel prices sharply and changing banking laws that will help the central banker to issue new banking licenses. Moreover setting up of the cabinet committee on investments will really help expedite approvals of project above Rs 1000 crore at a faster clip. The committee will be headed by the Prime Minister himself. According to one source there are little more than a 100 projects which require investments of more than Rs 1000 crore. Therefore a clearance to these projects would be a game changer for the economy.

Continuing with its momentum, the government recently announced some other measures like a hike in passenger rail fares for the first time in the last ten years. In addition to this, there is also unconfirmed news of an impending hike in diesel prices and LPG cylinders. The government is also expediting the process of disinvestment, which has a target of Rs 30000 crore for FY13. Out of this it has already raised Rs 6900 crore after selling a part of its stake in companies like Hindustan Copper, NBCC, and NMDC.

So the next question is, how would these reforms improve the finances of government and more than that how would they help in improving the perception of India as investment destination. It will be too early to predict the exact improvement these reforms will bring in to government finances. Nonetheless, it will definitely help to bridge the fiscal gap to some extent. Looking at the foreign money inflow through portfolio investments (USD 1 billion in the last one week alone) and direct inflow through FDI (has more than doubled in the month of September and October 2012 on a yearly basis), we find there is a definite change in the perception.

Although the government may miss its target of containing the fiscal deficit to 5.3% of GDP this year, the steps taken by it are definitely in the right direction, and will yield the required results going forward.