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'Perfect storm' that shook PM Grim alert, bitter pills

OUR SPECIAL CORRESPONDENT

New Delhi, Sept. 28: The enormity of the real challenge before Manmohan Singh is far higher than that posed by Mamata Banerjee. A "perfect storm" is gathering around the economy, according to a Centre-commissioned report packed with suggestions for a series of tough measures that will affect daily life and test the government's resolve to wade further into unpalatable waters. The report presented by the Vijay Kelkar panel, which was asked to suggest a road map towards fiscal consolidation, doesn't make pleasant reading: India is teetering on the edge of a fiscal precipice, staring into a deep abyss that brings back all the horrors of 1991 when the government of the day was forced to pledge the country's gold reserves and redeem its honour as a credit-worthy borrower. The Centre will find it difficult to accept many of the recommendations but the report portrays an alarming picture that is often overshadowed by political posturing from multiple fronts. The report gives a more comprehensive view of what may have pushed the Prime Minister into risking the stability of his government and taking decisions that prompted Mamata to withdraw support. Painting a gloom-and-doom scenario, the report warns of a cataclysm if the authorities decide to bury their heads in the sand and wait for the storm to pass. "We cannot overemphasise the need and urgency of fiscal consolidation. Growth is faltering and inflation seems to be embedded. The external situation is flashing red lights…if no action is taken, we are likely to be in a worse situation than in 1991," the Kelkar panel said. "In other words, our economy may be encountering a 'perfect storm'," the report said towards the end. Kelkar is a career bureaucrat who was finance secretary in 1998-99, became an executive director of the IMF and was the chairman of the Finance Commission till January 2010. He has been closely involved with the process of economic reforms in the country. The committee was asked to recommend mid-term corrections in the financial year and to chart a framework on the basis of that correction for the rest of the Thirteenth Finance Commission's term. The panel submitted its report to finance minister P. Chidambaram in the first week of September. The panel has suggested that the Indian government should bite the bullet and slash its subsidy bill by raising diesel, LPG and kerosene prices, increasing prices at ration shops every time they ratchet up remunerative prices for farmers, nudging up urea prices, and scrapping an outmoded system of subsidising sugar. It also advised the government to build a gigantic data tracking system that will ferret out tax dodgers. The panel recommended that kerosene price should be raised by Rs 2 per litre while that of LPG cylinders needs to be raised by Rs 50 per cylinder. It also suggested phased elimination of subsidy on diesel and LPG in the next four years and reduction in kerosene subsidy by one-third by 2014-15. It wanted direct transfer of cash subsidies to the beneficiaries, echoing a proposal made earlier by another panel headed by Nandan Nilekani and accepted the government. ( ) The report advised the government to sell its residual stake in Bharat Aluminium and Hindustan Zinc. Recent reports suggest that the government has initiated talks with Anil Agarwal-owned Vedanta group for the stake sale. The report warned that if mid-year corrective actions were not taken, the fiscal deficit would balloon to around 6.1 per cent of the gross domestic product (GDP), far higher than the budget estimate of 5.1 per cent. GDP is the broadest measure of economic activity in the country and represents the market value of all officially recognised final goods and services produced within a country in a given period. The other big worry is that the current account deficit (CAD) could worsen to 4.3 per cent of GDP this year at a time when world markets and capital flows are extremely fragile. CAD arises when payments for imports of goods and services exceed earnings from exports, potentially draining a country's foreign exchange reserves. The twin deficits have often been flagged by global investors and rating agencies as their biggest concerns about India as a hotspot for investment. The report projected that fiscal deficit for fiscal 2013-14 could fall to 4.6 per cent and come down to 3.9 per cent in 2014-15, if the measures to cut subsidies are undertaken. It is hard to immediately see the parallels with 1991 because the data points are difficult to compare. India's import cover of its foreign exchange reserves has slumped to just over 7 months from 11.1 months in 2009-10 – and has even drawn comment from the Reserve Bank of India. However, it's a far cry from the dire situation in August 1991 when India had money to pay for only 15 days of imports. Foreign currency assets in June 1991 had fallen to a nadir at $1.1 billion. On September 14, this year, India had foreign exchange reserves of $294 billion, which might seem like an enormous sum in contrast to the situation in 1991. But the scale of the economy has also changed dramatically in the intervening years. "Cross-country benchmarking suggests that India is clearly an outlier in terms of major fiscal indicators and currently has the least room for counter-cyclical fiscal policy response if conditions take a turn for the worse in global markets," the report said. "The situation is all the more dangerous now… because we have a surge in young people looking for jobs. If the elasticity of employment to GDP growth is 0.4, then growth of about 7 per cent per annum would give us 2.8 per cent employment growth. With a labour force growth of 2.5 per cent, this would provide adequate employment opportunities. However, if growth slips to say 6 per cent or below, and employment growth slows below 2.4 per cent, unemployment would rise," the panel said. The authorities, however, weren't ready to listen to the latest reformer-turned-Cassandra. "The government is of the view that in a developing country where a significant proportion of the population is poor, a certain level of subsidies is necessary and unavoidable. Measures must be taken to protect the poor and vulnerable sections of the society," said Arvind Mayaram, secretary in the finance ministry's department of economic affairs (DEA). Mayaram said the committee's recommendation on the withdrawal of certain subsidies was not in line with the stated policy of the government. The committee has pegged receipts from the government's divestment programme at Rs 10,000 crore in the current fiscal as against a budgeted target of Rs 30,000 crore. Mayaram, however, was confident that the government would be able to raise Rs 25,000 to 30,000 crore from the divestment scheme and would remain very close to the fiscal deficit target of 5.1 per cent of the GDP in 2012-13. The DEA secretary clarified that the government had not taken a view on the recommendations of the committee and the report had been placed in the public domain to invite comments. Late tonight, the government set the rules for 2G spectrum auction planned in November, which is expected to yield another Rs 30,000 crore. (See Business)