Posted in Finance Articles, Total Reads: 1860
, Published on 15 January 2013
Of late, the word, reforms, has become a darling of our country. Be it media, be it politicians or be it a common citizen, all are glued to the word. One wonders why there is so much fascination about reforms among Indians. The answer lies in the history of India. Our encounter with reforms dates back to the 1990s. The Indian Economy at that time was facing severe crisis with huge debt and unfavorable environment like unemployment, lack of infrastructure, low investment and many more.
At that time some key personalities rose to the occasion and showed their steel of nerve. The picture of much younger Dr. Manmohan Singh, then Finance Minister of India, carrying the briefcase loaded with the budget of 1991-92 is still etched in the memory of many. Soon Dr. Manmohan Singh was not only the Finance Minister; he escalated to the heights of heroism. He, with the backing of P.V. Narsimha Rao, helped India clear the bottleneck that had raised apprehensions on the very existence of the country. The reforms aimed at improving the financial health of the country by making the country more resilient to internal shocks (like droughts) and external shocks (like fluctuation in oil prices). This was accomplished with the implementation more liberalized economy principles and doing away with the fortification of closed economy. The reforms completely changed the course of the country’s progress. It helped India in getting global recognition.
Coming back to the present scenario, one can very well witness that since 2008 the world economy has been going through a tough phase and has not been able to recover. The recession in the US and the Euro crisis has severely impacted the growth of developing countries as these were the major markets for goods and services produced in the developing countries. India has been able to absorb the shock to some extent due to healthy domestic demand but there have been issues that have mired India’s unfazed growth. Policy paralysis has been a major bone of contention for investors in the country. Steel plant proposals of POSCO, Vedanta and many more have not materialized owing to rigid mandates by the environment ministry. The country has been plagued with numerous scams (Coalgate, 3G just to name a few) that have portrayed India Inc. in bad light. Our sovereign bond runs the risk of being downgraded to junk category by S&P. GDP forecasts of many international bodies have been remarkably low and there is a continuous surge in the fiscal deficit.
Amidst these woes, the launch of radical reforms by the UPA has been a promising move. Opening up FDI in civil aviation and multi-brand retail have been objected by many but it has been instrumental in the latest rally of the stock market due to inflow of foreign funds. It has been estimated that an amount worth Rs. 9,000 crore (about USD 1.67 billion) has been pumped in the Indian equity market. The hike in the price of diesel and the cap put on LPG cylinders could augur well for fiscal consolidation. The setting up of the National Investment Board has been aimed at tackling policy paralysis by expediting the approval of projects in an efficient manner. The steps initiated by the UPA have been compared to the reforms in the 1990s but one needs to contemplate on whether these steps can create the same impact.
The reform in retail allowing 51% FDI aims to improve the sector which offers maximum employment after agriculture. The purpose is not only to make way for Walmarts and Tescos of the world to earn profit but also to utilize the fund effectively. In India approximately 7% of wastage in food grains occurs due to lack of storage and transport facility. This is really demeaning for the country where 40% of the children are underweight. Under these circumstances the retail reform is really a boon as it clearly stipulates that 50% of the minimum allowed 100 USD investments should be in development of infrastructure. Money supported with expertise of foreign players would really improve the infrastructure and would lead to lowering of food prices.
FDI in civil aviation is a positive move to develop infrastructure and to resurrect a sector that has been in the red for a long time. The FDI route will not only bring a better infrastructure but also leverage on expertise from the industry that will make the aviation sector lucrative and competitive. FDI in the insurance would help in boosting investors' confidence and would lead to more capital inflows. This will also result in well-thought-out products both for individuals and the companies. Along with that it would lead to better distribution and pricing.
The fiscal deficit at a percentage of GDP stood at 5.8% in March and with burgeoning price of crude oil it is only expected to deteriorate. While a hike in diesel price could send negative vibes to the industry, the long run benefits of it are immense. Fiscal consolidation has been a priority of the government for a long time but a populist stance has prevented the government to take a tough stance. This move by the UPA has risen above populism and prioritized economic stability. The National Investment Board is also a welcome move as it will remove the
bottlenecks in initiating industrial activities. India is in dire need of infrastructure that would promote manufacturing based activities in the future. The role played by NIB will be critical in how manufacturing hubs evolve in India. A strong manufacturing base could also pave the way for greater exports and thereby our overdependence on crude import could be nullified to some extent.
Thus when analyzed properly the reforms are really the long-awaited step in the direction of improving the current scenario. It can take the economy to new heights and probably change the perception of rating agencies that are more than keen in downgrading our sovereign bonds. The aim is not only to serve the rich and affluent of the country but also to take care of the poor. Our growth has not been an inclusive one but the current reforms take care of the small players and the poor as well. Many sections of the society have been vociferous in expressing their dissent but that has been the essence of every revolution. We can easily conclude that the reforms are far from just reel, but no one can predict the future especially for a country as volatile like India.