Indian economy is looking to be at a perfect storm. A loose fiscal policy uncorked a spell of high inflation, triggering a tight monetary policy to fight it. The outcome was the economy began to lose momentum. Mismanagement added to woes by way of stalled industrial projects and policy flip-flops. The likelihood that the US will soon begin to roll back almost five years of monetary stimulus adds to the uncertainty.
The recent measures announced by the finance minister P Chidambaram looks quite inadequate to reinvigorate India's economy.
Import duty on gold has been increased thrice in 2013 by a cumulative six percentage points to 10%, in an attempt to rein in the current account deficit, but incremental rise will not solve a structural problem.
At the heart of India's current economic problems is the runaway fiscal deficit. It also happens to be under the direct control of the finance ministry. Chidambaram surprised everyone by announcing a fiscal deficit of just 4.9% of GDP in 2012-13, as this was lower than projected in the budget. This also helped the government regain credibility and was rewarded by an upgrade in the outlook of credit rating agency Fitch.
Still, the situation presents an opportunity to renew the jittery investors' faith in India. The overarching approach has to be to project stability. This will partially undo the damage of the last few years and also draw in the $70 billion Chidambaram forecast as the foreign money needed in 2013-14 to bridge the current account deficit.
The next step should be to follow through on the promised fiscal road map as this will be the single biggest stabilizing influence on the economy. Pulling back subsidies is critical. The food bill, however, sends a negative signal on the government's commitment and suggests an irrational approach to welfare measures. It should not be allowed to sidetrack reforms of fertilizer and fuel subsidies. Retail fuel subsidy today costs the exchequer Rs 379 crore a day and can be tackled through fast price adjustments.
Fiscal stabilization has to be complemented by catalyzing investments. Banks are hobbled by over Rs 2 trillion of bad loans. Here too the government can help by facilitating clearance of stalled projects that are stuck because of poor coordination among different arms of the government. Better systems are only the first steps for unclogging the investment pipeline. A turnaround requires a steadfast policy shift towards incentivizing growth.
Reduce the current account deficit- India adopted LPG policy in 1991 to avoid the precipitated balance of payment crisis since then the value of India's international trade has increased sharply. But a major fact remains same that its import always remains on higher side than its export. The major reason of this factor is its heavy reliance on global trader for import of commodities like oil, natural gas, machinery, electronic goods, gold and silver. India's oil import bill is seen as a major driver of its current account deficit due to global economic volatility in the oil market.
Time demands that India has to increase its global trade partner with whom it can have liberal policies like free trade agreement, currency exchange program, and technology development schemes. This is required to achieve the aim of faster, inclusive and sustainable growth.
Proper implementation of agriculture related schemes- Agriculture and its allied activities are an important of Indian economy but agriculture output of India lag far behind its real potential. With half of our population dependent on agriculture and its allied activities, there is a need of faster growth in farm sectors as even 1% point growth in agriculture is at least 2 or 3 times more effective in reducing poverty than the same growth pattern of non-agriculture sector.
There is a need of adopting modern agriculture practices, major land reform provision to increase land holding and targeted subsidy distribution schemes. There is a sharp requirement in revision of subsidy scheme (fertilizer subsidy, diesel subsidy) of govt. so that only real beneficiary will get the entitled profit and extra burden on exchequer can be reduced.
The authorities are required to provide strong impetus to schemes like BGREI (bringing green revolution to eastern India), RKVY (Rashtriya Krishi Vikas Yojana) etc.
Boosting the secondary sector of the economy, that includes manufacturing, construction and electricity, gas and water supply. But in recent past it has almost shown negative growth pattern that is an alarming for a nation and the more dismal fact is that it has contributed only 15.8% in employment part. There is a requirement of effective plan for this sector like investment in renewable energy program on priority basis. Government has to revamp its number of schemes so that adequate spending in this sector can be done.
Improving the investment-grade credit ratings- either domestic or foreign investment depends ultimately on confidence. As investors want to have a feeling that their money will come back with reasonable returns. There is a need to have revision for high-profile tax policy which created a negative impact on the interest of foreign investors. Committees like CCEA, CCI have to create a positive environment in the market by resolving difficulty of obtaining land and environmental permits. This requires a good amount of cooperation and communication between different ministries of the cabinet.
Increase the transparency of the system to reduce the level of corruption- corruption is one of the most pervasive problems in front of the nation which is assumed to be the major roadblock in the path of growth and development. Red-tapism, bureaucracy and license raj has made such its base that corruption is assumed to be the daily affairs. Excessive regulation, mandated programs and monopoly of govt. on distribution of certain goods and services are major causes of corruption.
The suggestive measures to improve this condition is that government has to implement the anti-corruption policies stringently like citizen's charter act, Right to information, public service bill, e-governance, e-procurement, e-choupal etc. These measures and some others can only reinvigorate Indian economy.