RBI governor D. Subbarao’s call in Tuesday’s credit policy statement to initiate policies with a sense of urgency to bring down the current account deficit (CAD) to sustainable levels seems to have galvanised the government into action. Finance minister P. Chidambaram on Wednesday talked of a further boost to foreign direct investment while commerce minister Anand Sharma announced an immediate increase in interest subvention of three per cent from two per cent for exports. It is hoped that the government takes a more holistic and realistic view of the ground situation besides such sops. For instance, the infrastructure for exports has to simultaneously be put in place. Imports of luxury items, which along with engineering goods account for more than the value of gold imports, have to be made more expensive with stiffer import duties, even though the depreciated rupee should have increased the cost of imports. The government should also, without waffling, offer attractive incentives to foreign manufacturers of these luxury items to start production in India.
Dr Subbarao said there was a case for easing of policy rates but for the fact that stabilisation of the rupee and caution on the external sector have got precedence over growth deceleration and inflation. He said the Indian economy had been overrun by what he called the “impossible trinity” trilemma that started in May. The trilemma: the external sector turmoil in global financial markets that arose from US Fed chief Ben Bernanke’s statement that the tapering of the quantitative easing (QE) programme could start in September. This led to a huge outflow of dollars by FIIs, thus accelerating weakening of the rupee; the large unsustainable current account deficit at 4.8 per cent and the weak investment climate. The government has leeway till September to tackle CAD and the weakening rupee.
Prime Minister Manmohan Singh hopes to tackle the dire economic situation with help from his elite Council for Trade and Industry, which he met on Monday. However, the issues discussed, as reported, were mainly sectoral problems of the council members and tax policy reversals, which have now become a non-issue. Dr Singh asked them to remove the mood of pessimism, but that is really up to the government itself — when it takes policy initiatives that are modest and non-elitist, but could lead to immediate, snowballing results. There is, for instance, a suggestion that the
government could invest in thousands of small projects across India in areas like public transport, sanitation, rainwater harvesting, domestic tourism, public transport, etc. This would spur employment, give the government huge revenue as people will begin to spend, and give more than a whiff of economic development. It will certainly bring cheer in place of despondency.