In the mood for reform

Now the government must outline path of fiscal correction, put investment back on track

The UPA government announced a number of reform measures last week. The announcements indicate a willingness to take political risks to push the reform process. The measures are signals for investors, domestic as well as foreign, that the Indian government is willing to undertake reform. In all likelihood, India will now avoid a rating downgrade. Yet, the economy is still staring at a deceleration to 5 per cent GDP growth, lack of job growth and inflation. Now that the government has shown its mood for reform, it must push further, to put India back on a healthy growth path. The two priorities of the government today must be fiscal correction and putting investment back on track.

The time till the next general elections in 2014 should not be spent merely managing the political downside of the reform, but in building up an argument for it and promising high growth in the next term as well, if the UPA comes back to power. The UPA government must, first and foremost, outline its path of fiscal correction. Will the diesel price hike be followed up by more hikes, removal of subsidy and eventually a freeing up of diesel prices? The subsidy regime for food, fertiliser and fuel has thrown the Indian fisc into an unsustainable debt path. The present correction, owing to the oil price hike, will only mean a correction of about 0.2 per cent of GDP. The disinvestment announced could bring in another 0.2 per cent of GDP. This does not solve the fiscal problem. The deficit needs to come down by roughly 2.5 per cent of the GDP to be sustainable.

At the same time, large welfare programmes, such as the NREGA, and the proposed health expenditure, will need greater spending. Anyone looking at the rising subsidy bill, at the size of the welfare programmes, and contrasting it with the limited tax base, can only wonder why India will not have a fiscal crisis. A continuation of the present policies cannot but land the country into a huge problem. Either before a crisis or after it, there is little doubt that the current expenditure path has to change.

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