By Manish Sharma

The hectic parleys in the run-up to the Union budget have been going on in full swing in the corridors of power in New Delhi. The Finance Minister (FM) has a tough job at hand of how to roll back the massive economic stimulus doled out last June. While economists are hankering about an exit as soon as possible, industrialists are persuading him to stay put with the economic-tightening measures for the time being. However, since India’s economy has been influenced more by political compulsions, it would be safe to assume that we might witness a great deal of the latter than the former when the FM rises to present his budget.

There are reasons to be despondent in the current environment. Last week, the Reserve Bank of India (RBI) hiked the Cash Reserve Ratio (CRR) more out of fear to assuage the inflationary threat emanating out of steep hike in food prices than to announce monetary contraction. It is clear to all that prices shot up for most agriculture commodities due to insufficient rainfall, inadequate reforms and inept handling of the crisis by the politicians. These factors have led to the supply-side constraints that jacked up the prices of food commodities. In fact, agriculture, which contributes nearly 20 per cent of GDP and employs around 60 per cent of the population, has been left to the vagaries of monsoon and middlemen. But, the RBI was almost forced to hike the interest rates -- a bad economic idea at this juncture of economic recovery, lest food inflation spill over to the real economy as well.

Similarly, petro reforms are another browbeaten subject. This week, the Kirit Parikh panel, appointed to lay the roadmap for viable fuel pricing policy, suggested freeing the pricing of petrol and diesel from government control and called for a precipitous hike in LPG cylinder prices. This is the third attempt by the government since 2002 to align fuel prices with crude costs -- a step that will help India’s state refiners and ease the subsidy burden on the exchequer that runs close to Rs 30,000 crore this fiscal. Two years ago, BK Chaturvedi, the ex-cabinet secretary, headed a committee on the same topic but nothing came out of it. It also urged the government to phase out subsidies on transport and cooking fuels. Thus, the Parekh panel has nothing new to offer from the Chaturvedi committee and, as such, the fate of its findings appears to be doomed. Notwithstanding that price distortions are leading to skewed consumption pattern, there are internal lobbies that would jettison any reform agenda.

The telecom sector too has found itself at the receiving end of this policy jumble, time and again. In a latest setback, the telecom ministry postponed the auction of 3G spectrum to the next financial year (2010-11) due to scarce spectrum. The auction was expected to generate Rs 35,000 crore that could curb the fiscal deficit by around 0.5 per cent. The spectrum crunch is again due to turf war between the telecom ministry and defence ministry. Banking, insurance and corporate debt markets too share similar woes of apathy towards de-regulation. One of the prime reasons that India managed to evade financial recession last year lies in its ability to attract capital inflows. Both the portfolio investments and direct inflows sustained the working capital requirements of various firms. Sending confusing signals to foreign investors through continuous policy flip-flops and half-baked attempts at reforms would surely turn them out. Prime Minister Manmohan Singh, who was an astute finance minister of yesterdays, has turned into a seasoned politician for whom talk has become more important than the walk.

Indiabiznews, February 07, 2010