Economy will tank if it's not bolstered by reforms, warns P Chidambaram

ET Bureau Oct 9, 2012, 01.10AM IST
(Chidambaram said further…)

NEW DELHI: Delivering a grim warning that India risks a sharp slowdown without further reforms, Finance Minister P Chidambaram has vowed that the pace of reforms will remain "strong and unabated" as he promised a credible plan for the economy's fiscal consolidation.

Chidambaram, widely credited for reversing a perception of drift in policymaking and resultant turnaround in sentiment, said further reforms were essential if the economy had to generate jobs for its large population and exuded confidence that growth will recover from the fiscal first quarter's level of 5.5%.

"Businesses are in a wait-and-watch mode. I'm confident investments will pick up in the fourth quarter of current financial year," he told the Economic Editors Conference. "We should believe that we have the capacity to overcome any crisis, as we did in 1991, 1997 and 2008."

Chidambaram, who was shifted to the finance ministry in early August and has since shepherded a raft of policy measures to boost sentiment, said the government will present a "credible and feasible" fiscal consolidation strategy that will run through the 12th Five-Year Plan.

There is widespread apprehension the government will overshoot its fiscal deficit target of 5.1% of GDP by a huge margin on the back of a hefty increase in subsidies and as revenue collections fail to keep pace with estimates penciled in earlier because of the economic slowdown.

A panel headed by former finance secretary Vijay Kelkar last month warned that the country was on the edge of a "fiscal precipice". The government has already spent most of the amount it had set aside in the budget for petroleum subsidies and Chidambaram said it would need to spend more under this head, and would therefore make a supplementary spending demand in the winter session of Parliament.

Despite all the dire commentary about the economy's fiscal condition, the government has not budgeted any extra market borrowings for the second half of the current financial year, sending a signal that it will try and stay close to the fiscal deficit target.

Chidambaram said the Kelkar committee's observation of a 'fiscal precipice' was the worst-case scenario, one that was neither inevitable and nor unavoidable. He, however, said he was glad that the committee had laid down the truth. "No one will have confidence in the Indian economy if there is uncertainty about the fiscal stability of the country," he said. International rating agencies had threatened to downgrade India's sovereign rating, citing high current account and fiscal deficits, declining growth and lack of a credible policy action to turn around the economy.

The government is hoping its recent reform measures, notably opening up of multi-brand retail, increase in administered prices of diesel and the capping of subsidised cooking gas cylinders, will allay some of the ratings firms' concerns and avert a ratings cut. Chidambaram said the government should be given its space to govern.

"The government of the day must be allowed to lay down policies, pass legislations wherever necessary, and get on with the job of implementing those policies... Every government is entitled to lay down policies. Opposition to policies is legitimate, obstructionism is not," he said. He questioned the opposition to FDI in multi-brand retail, terming it "unnecessary and unjustified" and citing the first Cabinet note on the issue prepared by BJP-led NDA government that had argued that allowing foreigners into the supermarket would generate jobs. Chidambaram also said the Centre will be able to sort out issues concerning implementation of GST soon.