Forget the bygone year, not the lessons


The new year has begun and the world has bid goodbye to an year that was not good by almost any yardstick of measurement. Protests across India against rape laws and Government inaction hogged limelight during the last week of the year 2012. It is likely to witness momentum in the coming days, too.

Nothing much happened in the first three quarters of the last year in Indian policy-making or taking fresh initiatives to tackle twin problems of rising inflation and slowing GDP growth. It is only towards the end of the last quarter that some sense of urgency has crept into the ruling class and the Government. After a long hiatus, the Parliament has started functioning and has taken up the work of legislating with or with out debate. The deviation is discernible from the time the Finance Minister, Mr Pranb Mukherjee was elevated to the post of Presidency. Back in action, the new FM, Mr Chidambaram, quickly assumed control and teamed up with his old colleague PM to usher in a few reforms.

The world economy, too, had its own share of travails and problems. Euro-zone came perilously close to breaking up. After all the ups and downs, finally Greece was bailed out but not before the European Central Bank (ECB) asserted its authority decisively. It has learnt a trick or two as a Central bank supervising over 6,000 banks in Europe. It has managed to send clear signals to the markets that when it does decide to bail out a nation, bankruptcy is imminent. Markets do respond much faster than the Central bank. As a result, even after declaring that it would bail out if it is approached, no country would take that risk; Spain, though in considerable distress, has not asked for a package! It is another matter that the prospects of Euro-zone still look dim.

Much of Europe will see testing times in 2013 as well. The experiment of common currency is akin to Gold standard without having to deposit gold for printing currency. The theory of currency ‘denationalisation’ is creating huge problems, but there seems to be no choice for the member nations. They cannot print currency, though they want to, in order to come out of the rut. UK has this option but knows that it is not without the flip side.

Together with EU, the US holds the key for global recovery. With the results of Presidential elections there, the air of political uncertainty has been cleared but not the prospects of economic recovery. Quantitative Easing (QE) has helped to the extent of putting more money in the hands of people driving up demand. The only argument in favour of QE has been that without it, things would have been worse for the US mainly and perhaps to the world economy as well. Despite the fears of fiscal cliff, path has been cleared for more QE. As was only expected, short term considerations have outweighed the need to cut spending and increase taxes. After all, congress elections are just short of two and a half years!

Fortunately, things look a shade better in India going in to the new year. By allowing 51 per cent FDI in multi-brand retail, Mamata’s bluff has been called, though belatedly. The banking bill has been passed; this will give more powers to RBI, the banking regulator. Not only will this improve banking supervision and regulation, it will also pave the way for issuing licences to a few more new private players. Quietly, the new company bill has also been passed which is a significant step. It removes several anomalies that have existed for decades in the Indian Companies’ Act of 1956.

If the Indian Government takes a serious look at its own fiscal cliff, it can hope for a better economic future. Already the central fiscal deficit is over 80 per cent of budgeted target. Fuel subsidy bill is getting worse; cash transfers will worsen the fiscal situation. Food security will put an enormous amount of burden on the fisc. and on a permanent basis. These challenges are indeed daunting.