Fenil's Library

After the Congress party scored its biggest electoral win in two decades in the polls held in the just concluded polls, the need of the hour is to set the directions and limits of the electorate’s expectations in terms of the prospects and the challenges that the government is likely to face.

A continued tenure of the United Progressive Alliance (UPA) coalition brings with itself a much needed political stability, which would now loosen the political shackles that have restrained the country’s economic growth. 

While the government’s fiscal & monetary measures towards resurrection of the ailing economy would continue undoubtedly, the Congress party has also announced a series of reforms in its manifesto.

With the focus on socio-economic development, the party plans to build further on the scheme based on the National Rural Employment Guarantee Act, which provides 100 days of work at a real wage of Rs 100 a day to all entitled.

On similar lines, the enactment of a National Food Security Act too has been announced.

Affordable quality education also continues to be on the government’s agenda.

Focusing on the security aspect, efforts would be expected on comprehensive national security, and other provisions for health security and insurance.

However, the immediate need of the government is to uplift the morale of the Indian economy and put it back on high-growth trajectory. This would be possible through inducing demand (domestic as well as international) by implementing huge infrastructure projects and in the process attracting foreign investments, taking measures to revive the export sector by making them more price-competitive and through other policy incentives to the exporters.

Earlier, there was an emphasis on infrastructure projects including initiation of the Golden Quadrilateral Project as part of the National Highway Development Project, and the Jawaharlal Nehru National Urban Renewal Mission project to improve city infrastructure. Also, IIFCL has been sanctioned to raise funds worth Rs 10,000 crore to implement projects in sectors such as roads, ports and airports.

However there is a need for enormous investments to meet this, for which the government needs to encourage private investments and develop projects on public private partnership (PPP) basis. There is a need to implement PPP projects more aggressively in the immediate future.

Post liberalisation reforms in 1991, which is seen as the economic independence of the country, Indian economy has accommodated an unprecedented amount of foreign investment. This led to an increase in growth in IT and ITES sectors, telecommunication and other infrastructure projects, resulting in robust GDP growth in the past few years.

Foreign direct investment up to 100% is permitted in most of the infrastructure sectors. A similar liberal stance could benefit sectors like insurance, pension and retail.

Domestic investors should be able to access international markets easily for the necessary funding.

As for accessing external commercial borrowings (ECBs), under the existing guidelines, ECBs can only be obtained from eligible lenders such as shareholders, international banks and multilateral financial institutions such as the Asian Development Bank and the International Finance Corporation. A more liberal approach by the government could make India an attractive destination for investments.

Liberal policies in terms of opening up of various sectors for foreign funds would not only boost economic growth, but will also support the rupee. Official data had also shown that foreign institutional investors remained net buyers for most days in May, signalling renewed investor confidence in India as a safe investment destination compared with other countries. On the whole, sentiments for the local currency remain bullish.

However, given the strong correlation between Indian equities and local currency, volatility in the rupee movement can’t be ruled out. The rupee would move within the band of 46.50 - 48.00 in the near future. 

Moving to the bond markets, gilt yields are driven mainly by surplus liquidity in the system, understating the effect of frequent auctions of government securities and T-bills.

Given the requirement of huge market borrowings, the Reserve Bank of India has been maintaining adequate liquidity in the system. As a result, the UPA government’s huge borrowing plan would have muted impact on bond yields in the near future. The 10-year benchmark bond would trade with a yield of 6-7%.

The overall gloomy picture projected by Indian exports in the past few months with March reporting a negative growth of 33% (in US dollar terms); there is a dire need to focus on the revival of this sector. Our export sector faces some laggards in its growth process, such as the need to exhibit improved cost competitiveness given strong competition from countries like China and South Korea. A lowering of import tariff on raw materials, a considerably less-volatile exchange rate and boosting the export sector through stimulus packages may help in reviving the demand for Indian goods and services in the world.

However, India will face a trade off between a number of stimulus packages offered by the government for restoration of confidence in the economy causing widened fiscal deficit and the subsequent deterioration of India’s sovereign rating. This would cause a significant deviation from the Fiscal Responsibility and Budget Management (FRBM) targets, making the country’s future sovereign rating outlook uncertain. This makes it important for the government to revisit the FRBM targets as one of the important concerns to come out with a renewed roadmap for achieving fiscal consolidation after making the required amendment in the existing FRBM Act. This will help in maintaining the country’s credit rating with optimistic prospects and garner a steady and larger amount of foreign funds to complement the domestic investment resulting higher growth rates in the times to come.

The writer is chief economist, CARE Ratings. Views expressed are personal.