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Chidambaram urges reform push, hopeful on economy

Source : REUTERS
Last Updated: Mon, Oct 08, 2012 11:54 hrs
Indian Finance Minister Chidambaram gestures during an interview in New Delhi.

The economic slowdown has bottomed out, but a full recovery requires tough decisions, Finance Minister P. Chidambaram said on Monday, signalling his intent to push through unpopular reforms.

After years of policy inertia that hit investments, slowed economic growth to a near three-year low and put India's investment-grade credit rating in peril, the Congress-led ruling coalition is on a reform overdrive.

"Without reforms, we risk a sharp and continuing slowdown of the economy, which we cannot afford given the imperative need to generate jobs and incomes for a large population, most of whom are young," Chidambaram told a news conference.

In the last few weeks, the government has increased the price of heavily subsidised diesel, opened up the retail sector to global supermarket chains, allowed foreign airlines to buy stakes in local carriers and proposed raising the bar on foreign direct investment in insurance firms.

(Visit special coverage page: Political Pulse & India's Road to Reforms, click http://in.reuters.com/subjects/india-politics-reforms)

WORST OVER?

While the recent reforms have helped financial markets rally and boosted investor sentiment, they may not be good enough to lift GDP growth, which slowed to 5.5 percent in April-June.

Chidambaram, who moved into his post in August, struck an optimistic note, predicting better economic growth in the remaining quarters of the fiscal year to end-March 2013 and a return to average growth of about 8 percent during the next five years. Analysts say federal finances and capital investment need to improve before the economy again hits the 9 percent growth it was clocking before the 2008 global financial crisis.

The investment rate has fallen to 32 percent of GDP from 38 percent in 2007/08. The fiscal deficit widened to 5.8 percent of GDP last year from 3.5 percent in 2007/08.

The high deficit is counteracting the Reserve Bank of India's efforts to control demand-driven price pressures, while the government's use of domestic savings to finance the deficit is crowding out private investment and lowering growth prospects.

FISCAL CORRECTION

In March, New Delhi promised to narrow the fiscal deficit to 5.1 percent of GDP this fiscal year, but sluggish tax revenues and high spending on fuel, food and fertilizer subsidies have cast doubt on that commitment. "No one will have confidence in the Indian economy if there is uncertainty about the fiscal stability of the country," Chidambaram said.

"It is our intention to announce a credible and feasible path of fiscal correction beginning this year and ending in the fifth year of the 12th plan," which ends in March 2017.

In recognition of the mounting worries over public finances, Chidambaram recently appointed a committee led by a former official, Vijay Kelkar, to recommend ways of improving government finances. In its report, the Kelkar panel said the economy was on the edge of a fiscal precipice and suggested slashing subsidies urgently to curb a deficit it said could hit 6.1 percent of GDP this fiscal year.

But in a country where any tinkering with subsidies raises a political storm, it would be tough for the government to implement the panel's recommendations in full.

Chidambaram said all the subsidies on food, fuel and fertilizer cannot be wished away, but promised to take corrective steps after receiving feedback on the Kelkar report.

To ease pressure on the fiscal deficit, the government is looking to increase revenues through more efficient tax collections, an auction of cancelled second-generation mobile phone licences and sales of stakes in state-run firms.

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