The signals that matter

Key government initiatives that have recently cleared Parliament or the cabinet can be slotted into two categories. The first set includes approvals for foreign direct investment in retail and aviation, the land acquisition bill and the new Sarfaesi Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest). The second set includes approvals for disinvestment in HCL, NMDC and NTPC, the reduction in the price of unsold telecom spectrum and the investment policy for urea.

It is the second set that investors betting on the Indian economy will be watching closely at this point. These measures will earn money for the government. The overall macro results for the economy this fiscal are already in place. The GDP growth rate, as former chief economic advisor Kaushik Basu pointed out on Friday, would be close to 5.5 per cent this calendar year, which is close to the rate for the fiscal year too. Headline inflation is likely to be better than the projected 7.5 per cent by the end of March — the latest figure is 7.24 per cent. The implication is that the government now needs to stick to the working plan to keep its fiscal arithmetic in order. The policy changes, including Aadhaar, will only reveal their impact in the next fiscal year. And so, if credit-rating agencies are to change their assessment of India, they will want to know how much money the government is putting on the table to chase the fiscal deficit. They will evaluate the first set of moves in terms of whether they create enabling conditions for investors to regain interest in the economy. Their decision is crucial, because foreign pension, insurance and other long-term funds will be able to keep investing in capital markets here only if India retains its investment grade. A successful conclusion of the spectrum auction, then, is much more significant for the immediate future than how the land bill pans out, for instance. Similarly, the relaxation of the cap on subsidised LPG cylinders from six to nine could adversely affect the economy to an extent that the passage of key financial sector legislations cannot make up for.

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