As Finance Minister Palaniappan Chidambaram stood up in Parliament on Tuesday and made a fervent pitch to the Lok Sabha to support his 10-point action plan, it became amply clear that the embattled FM had absolutely nothing new to say. His 10-point plan was a rehash of a to-do list which every single economist, policymaker and analyst worth anything already knows.
From motherhood statements like the need to rein in the fiscal and current account deficits to recapitalising public sector banks, reviving the investment cycle, adding to the foreign exchange reserves, encouraging manufacturing and exports, Chidambaram talked of things which should have already been done, rather than figuring in a list at the fag end of the United Progressive Alliance (UPA) government’s second term in office.
It was no surprise, then, that the very next day, the rupee promptly crashed to its lowest ever, and is now within kissing distance of the 69-mark. And despite the government’s obvious displeasure earlier at some reports suggesting the rupee may hit 70 in the near term, that day is clearly upon us. Deutsche Bank and Standard Chartered are both of the view that the rupee will hit the 70 mark before it recovers. On 28 August, it closed at 68.84, with 70 a mere formality, and people talking of 75 being a distinct possibility in the near future.
The pointlessness of Chidambaram’s 10-point agenda is borne out by the fact that despite some knee-jerk announcements to try and stem the rupee’s precipitous decline, the government and the Reserve Bank of India (RBI) have been able to do nothing in the wake of continued global tremors, particularly on account of prolonged uncertainty about when the US Fed’s Quantitative Easing (QE) program will actually begin to be tapered down.
That India Inc’s tallest leaders too have all but given up hope on any possibility of reform is also borne out by Ratan Tata’s statements, where he said India had “lost the confidence of the world” and that vested interests had led policy to be “changed, delayed and manipulated.” Strong words those, coming from someone held in high esteem by corporate India and the government.
As if the global headwinds and uncertainty was not enough – the latest being the concerns over Syria – the Food Security Bill was, perhaps, the biggest blow to have come to any hopes of reform or a curtailing of the ballooning fiscal deficit. With elections clearly the immediate target, the Congress-led UPA managed to push through the Bill and thereby dashed whatever hopes remained of a return to fiscal prudence. But Chidambaram, on his part, has promised not to cross the red line of keeping the fiscal deficit at 4.8 percent of GDP next year, and the current account deficit (CAD) at $70 billion. For now, few are buying that promise.
To be fair to the FM, he has attempted to make the right noises, at least by way of assurances and announcements. In Parliament, he even talked of the problems in the coal and mining sector where clearances have been difficult to obtain, exacerbating the problem. But in these days of heightened uncertainty, these statements amount to nothing. The reality is that the cracks are showing everywhere in the UPA edifice.
‘Most vulnerable’
In a telling note, Morgan Stanley has pointed out that the manner in which the rupee has been falling – down 20 percent since May – has shown that though other emerging market economies have also been hit by this contagion (a fact repeatedly referred to by Chidambaram and his colleagues at North Block), India is “arguably most vulnerable” due to its huge fiscal deficit and CAD.
“In most emerging nations, the typical circle of life sees political leaders grow complacent when times are good, triggering a crisis which forces reforms leading to a revival of good times. India has followed this cycle for decades,” the hard-hitting report adds, expressing surprise that this has happened this time under the stewardship of Prime Minister Manmohan Singh, widely believed to be the architect of the 1991 reforms. The catch this time, perhaps, is that there is little evidence now of such ‘forced reforms’.
The economy is teetering on the edge: The CAD has ballooned to $88 billion, FDI is falling and Indian companies are struggling with their overseas debt as the rupee crashes to new lows. Ratings major Standard & Poor’s (S&P), too, says the road for India (and Indonesia) will be “rocky” since they are the largest-deficit countries, though S&P does add that this situation is not like the 1997 Asian crisis.
As every new trading session brings more bad news, it is becoming increasingly clear that Chidambaram’s plans will just remain a set of items which, if implemented on time, could have saved the economy from turning from the toast of the world into an example of an Asian dream gone horribly, horribly wrong.
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