The government's newly found determination to push ahead with reforms has drawn ecstatic reviews from the media and businessmen. 'From fasting to feasting' is how one businessman is said to have reacted. Is the euphoria merited?
Well, neither S&P nor Moody's, two agencies the government must have had in mind when it chose to go on a reform offensive, are impressed. S&P has downgraded its growth forecast from 6.5% to 5.5%. Moody's says its rating will remain unchanged for now. So do the reforms make sense?
From a long term point of view, many of them do. You can't quarrel with a gradual alignment of petroleum prices with international prices. FDI in aviation should be ok. I am not very sure about FDI in retail, not having researched this matter well enough. But, I guess one can make out a case for a modern retail sector to exist with the traditional one.
Trouble is, these measures will not make a difference to short-term growth prospects. Whether you cut fuel subsidies are not, you are going to end up with a fiscal deficit for 2012-13 close to last year's figure of 5.9%. It is not just that subsidies are high or growing; tax revenues will not grow fast enough at the current GDP growth rate.
From the short-term point of view, we need to expedite ongoing projects. That should suffice to match last year's 6.5%. As for the medium term objective of growth of 8%, I am sceptical about achieving fiscal consolidation as a means to raising the growth rate. This did not happen earlier; it's difficult to see it happening now.
We had fiscal consolidation in 2004-08 because of a growth boom that was linked to the global boom. The challenge, therefore, is how do we raise the growth rate in the absence of a similar global boom. There has to be an indigenous growth impulse. This can only be enhanced public investment. I would say: disinvest in a big way and use much of it for public investment. That will boost growth, cause the fiscal deficit to fall and lead to a decline in interest rates.
More in my ET column, Reform push may not deliver.