General elections in India usually attract a lot of attention. This year is no different. The key message given by all major political parties was that of enhancing growth and generating jobs. The emphasis on improving the state of the economy and bringing confidence back is acknowledged in their manifestos. I think this is absolutely essential.
Admittedly, the last two years have been difficult for the economy. Growth has been in the sub-5 percent range. The current account deficit (CAD) had moved out of the comfort zone before it was brought back within the range considered normal by the Reserve Bank of India. The fisc (fiscal deficit) has remained under strain even if the latest numbers indicate that we did not cross the red line set by the finance minister. Inflation, particularly food inflation, is becoming endemic. Early indications for the current year show that growth will again be around the 5 percent mark. Our vulnerabilities on the external side continue with limited coordination expected among monetary authorities of different countries. The mounting subsidy burden would constrain the government balance sheet. And with a repeat of the El Nino phenomenon, we could see monsoon and agriculture production being impacted, with a cascading effect on food prices.
While the policy contours of the new government to tackle these issues will become clear in due course, there are a few areas that should be focussed on.
First, restart the investment cycle. Without adding to the productive capacity of the economy, we cannot push up growth in a sustained manner. To achieve that, it will have to work on both intangible and tangible issues. There must be clear articulation that investors will be provided a predictable environment while ensuring sanctity of contract, stability in the tax regime and applicability of legislations prospectively.
Second, liberalise factor markets. We have liberalised the product markets but have not followed suit in case of factor markets. Whether it is land, labour or capital—the market for each of these is plagued with rigidities. For the healthy growth of our enterprises, we need to rid them of the difficulties encountered while acquiring land, hiring labour or raising capital. We need to review the new Land Acquisition Act, consider applying more flexible labour laws to new entrants in the workforce and ensure capital is available at competitive costs to MSMEs (micro small and medium enterprises).
Third, make fiscal prudence the cornerstone of government functioning. The first budget will be looked at with a lot of interest. It must signal bringing efficiency in expenditure management through rationalisation of subsidies. The Aadhar-based direct cash transfer model has proved effective in certain states and should be continued. Also, we need greater effort towards raising resources through the disinvestment of PSUs, including those in the services sector, as well as monetisation of land as advocated by the Kelkar committee. Any new programme or extension of existing programmes should be backed by matching resources. All revenues and expenses must be correctly identified and reflected in the budget numbers.
Fourth, evolve a plan for mitigating food inflation. This is a supply side problem that calls for a quantum jump in food productivity, straightening kinks in agri-supply and distribution, and reducing wastages. Given the growing demand for protein and mineral rich food items, we need to have a second green revolution that focuses on fruits and vegetables, meat, fish, eggs and dairy products. We also need an effective cold chain and warehousing infrastructure. The desired changes in the APMC Act have not been effected by all states and the new government should make this happen.
Fifth, prepare a strategy for maintaining a healthy balance of payments account. This should entail a targeted reduction in CAD. Keeping it within manageable limits is essential to prevent a sharp depreciation of the rupee. This could fuel imported inflation and add to pressure on the fisc through higher oil and fertiliser subsidies. For maintaining CAD at sustainable levels, the trade deficit needs to be reduced significantly from the present levels of 9 to 10 percent (2012-13). This would require economising imports of oil, coal, gold, electronics, etc, by raising domestic production and augmenting exports through greater diversification of products and markets.