Prime Minister (PM) Dr. Manmohan Singh has taken over the charge of Finance Ministry at a critical time. While the economy has been reeling under a bad phase of low growth and high inflation, the clean image of the PM has also been tarnished due to myriad corruption charges. But his return to the North Block, where the office of the Finance Ministry is situated, has once again kindled hopes, among the corporate class in particular, of a repeat of 1991-like situation when he unleashed first-generation economic reforms and scripted a remarkable economic turnaround. The PM has also somewhere sensed the pulse of this audience that has always been his core supporters and has played to the gallery. His first few remarks, particularly about “reviving the animal spirits in the economy” too indicate that he is eager to reverse the climate of pessimism as far as investors’ sentiments are concerned.
The government press machinery too is busy projecting the PM as a change-agent. An impression is being created that there was a rift between the PMO and the Finance Ministry, and the PM was not in favour of many steps that Pranab Mukherjee had taken during his three-year tenure. Within 24 hours of Mukherjee's exit, the PM gave strong hints to drop some of the contentious tax proposals promulgated in the budget. The Finance Ministry has cleared the air by saying that P-notes will be exempt from the contentious GAAR proposals though uncertainty over FIIs remains.
Also, there are indications that the PM has decided to "look afresh" at the retro tax against Vodafone. The Commerce Ministry is already testing the waters regarding multi-brand retail, and the government may notify the retail FDI policy after the presidential election. It is amply clear that the PM is going all-out to woo foreign investment.
Thus, a political climate has been created which has narrowed down the view on economic reforms only towards liberalizing FDI. Notwithstanding the fact that growth rate has slipped badly due to coalition compulsion, economic populism that lead to high fiscal deficit, and inadequate infrastructure. Besides this, there are many factors that are beyond immediate control of a finance minister. The RBI has withheld any
further cut in interest rates as the May benchmark inflation rose to 7.55 per cent.
The IIP grew by just 0.1 per cent (y-o-y) last month and trade deficit slipped to an all-time high in the last 20 years. Clearly, things have taken a bad turn and needs considerable course correction and actual policy implementation rather than a pep talk or a zestful remark.
Even if the government allows FDI in retail, there remain structural bottlenecks which may dampen the foreign investors’ participation. Important reforms steps that are needed in the long pending Goods and Service Tax (GST) have still eluded a political consensus, while petroleum subsidy still remains a politically sensitive issue. It is highly unlikely that the PM may be able to do something on these contentious issues.Irrespective of the reform shenanigans, it is highly unlikely that the PM has the necessary political will to unshackle antiquated labour laws and reduce agricultural subsidies to take on powerful domestic lobbies.
The PM was a rank outsider two decades ago and had full support of the then PM Narasimha Rao to implement breakthrough reforms like industrial deregulation, privatization, and opening up of international trade. It remains to be seen how much does Congress President Sonia Gandhi back him in his reformist zeal. After losing power in 1996, the Congress party has become quite wary of market reforms and has stuck to socialist moves like fiscal expansionary and socialist welfare schemes to reap electoral dividend. The PM has raised the expectations of market forces through his aggressive talks; he must need to walk the talk now to save his 1991 legacy.