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Can Dr. Manmohan Singh Resolve the Financial Mess ?

Monday, July 02, 2012
By Roop Karnani

The prime minister is a man who can help overcome our domestic and global economic challenges as he has done in the past, when pushed to the wall. He has taken over the FM portfolio for now and will retain it for at least two months. All eyes will now be on him. So far, he has made the right noises, now he has to walk the talk.

The big booster to the economy promised by Pranab Mukherjee on his last day in office, proved to be a damp squib. There was no need for him or the government to make this announcement because it built up expectations and then the expectations fell flat. The markets also gave it a thumbs down.

Just raising ECB limits does not help when the currency is volatile. The key at the present moment is to control currency fluctuations. People are talking about Rs. 58 to Rs. 60 as the next level for the rupee as the structural problems are not being addressed. This government has only made promises in the last 2 years and has done nothing to address them, except to fight for its own survival at the expense of creating a big financial mess. Pranab Mukherjee’s achievement as a financial minister in his 3 years in office has been dismal especially in his last year. He is leaving behind a legacy of high current deficit, depreciating rupee, high inflation which is only likely to get worse, and a high fiscal deficit, besides making retrospective laws as also introducing one sided decontrol of petrol prices.

That’s not all - leaving the other fuel prices unchanged have skewed things. And most importantly, having allowed the GDP growth rate to drift to 5.3% presently, which is the lowest since UPA came to power in 2004. His only achievements have been to firefight politically on behalf of an inept and corrupt government, time and again and save them from collapsing.

Fortunately a new equation has evolved: Exit Pranab Mukherjee and enter Dr. Manmohan Singh as the new FM. His first task is to turn the dismal sentiment around by less promises and more action.

He has many decisions to take – the telecom spectrum auction, the aviation sector and more importantly the power sector and subsidies. Diesel accounts for 60 to 70% of the fuel consumption amongst petroleum products. A small increase of Rs. 2 to begin with should go a long way in cutting down subsidies, and then a few more gradual increases. But I don’t see action happening on the diesel front at least till after the presidential elections.

The domestic political scenario is still uncertain. Consider this - in an exclusive interview to a UP newspaper, Akhilesh Yadav has said that he has asked for a Rs. 90,000 crore package from UPA for his state, in return for support to the UPA. They have given him assurances, but will they give him that kind of money or even, say, a negotiated package of Rs. 50,000 crore. But where will the money come from? For the UPA to survive it will have to shell out big money for support, which means an increase in the budget deficit coupled with an increase in prices, taxes, etc. For the last three years the UPA has not managed to push through GST or DTC even though the DTC has been watered down considerably. Now we are hearing that the deadline of 31st March 2013 for GST implementation may not be met. So it may be another one year before we see GST coming into force.

Globally too, the situation is worsening. Now Cyprus is the latest in a string of nations to ask for a bailout, even though it is not in EU.

India has a trade of 91 billion dollars with the EU which translates to Rs. 4.8 lakh crores. This is going to be seriously affected as there are no signs of a quick fix solution to the EU crisis. In the last two years since the crisis began, it has only gotten worse. Not only India but the US is also beginning to be affected. Many large US companies like P&G have only last week downgraded their earnings forecast, because of troubles in Europe. The PM who has just returned from the G – 20 summit is well aware of all this. He is a man who can take up both the domestic and global economic challenges as he has shown in the past, when pushed to the wall. He has taken over the FM portfolio for now and will retain it for at least 2 months. All eyes will be on him now. If he can even change the sentiment and attract FDI, the currency will then take care of itself and with crude oil now at 78 dollars a barrel, and crude and commodities still continuing to fall, he can get us out of the mess. So far, he has made the right noises, now he has to walk the talk.

If he does so, Manmohan Singh will then be remembered for posterity as the man who once again accepted and resolved a challenging situation for India.

The domestic political scenario is still uncertain. Consider this - in an exclusive interview to a UP newspaper, Akhilesh Yadav has said that he has asked for a Rs. 90,000 crore package from UPA for his state, in return for support to the UPA. They have given him assurances, but will they give him that kind of money or even, say, a negotiated package of Rs. 50,000 crore. But where will the money come from?

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