The tasks ahead

Amid the ongoing rounds of high-voltage electioneering, a statement by Finance Minister P. Chidambaram deserves closer scrutiny. It is not for the first time that Mr. Chidambaram has painted a rosy picture of the economy that he will bequeath to his successor. The two specific achievements claimed by him — a spectacular turnaround in the current account and containing the previously intractable fiscal deficit — are as well known as they are contestable. On the face of it, the government can claim credit for getting a handle on the current account deficit. During the last year the CAD at $88 billion, or 4.8 per cent of GDP, threatened macroeconomic stability. Policymakers seemed to have run out of ideas to, for instance, stem the sharp depreciation of the rupee. The government hopes to announce a dramatic reduction in the CAD to about $32 billion, or 1.7 per cent of GDP, when figures for March 2014 are announced. On fiscal deficit, the Finance Minister has said that the self-imposed “red line” will not be breached and that the deficit will be contained within 4.6 per cent as budgeted for. These would be considered impressive feats, except that it is the quality of contraction — in the CAD and in fiscal consolidation — that matters more than the numbers.

That the sharp fall in the CAD is due to an aggressive clampdown on gold imports, by far the largest component of imports, is well-known. The restrictions on gold imports cannot last indefinitely. There is already substantial evidence that a large part of the gold trade is shifting underground, a development that will have serious consequences for society at large. A part of the insatiable demand for gold can be moderated by developing easy-to-invest savings instruments that offer returns that beat inflation. Also, the claim of containing the deficit loses much of its gloss if one realises that the contraction is not due to the sustained rise in exports but due to a fall in non-oil imports. The latter is an unmistakable sign of a slowdown, something which is not quite comforting. On fiscal consolidation, it is known that expenditure including Plan expenditure has been compressed, and besides there have been some dodgy practices of pushing items of expenditure to the following year and taking credit for receipts which in the normal course are not available during the period under reference. The arguments for greater transparency in government finances are familiar, but need to be restated to place the macroeconomy in its proper perspective. Among other challenges, the new government will have very little time to present its budget by July. While the economy is not in any crisis, the overall situation is not very comforting either.