Last week, India further eased rules on foreign direct investment in a range of industries in an attempt to boost the economy which grew at its slowest pace in a decade during the 2012-13 financial year. For Prime Minister Manmohan Singh, the irony could not have been more cruel; the man who is credited with lifting the country's economy from the brink of disaster in 1991 as finance minister, is today, as prime minister, facing a situation which is not very much better.
In fact, in at least two respects — economic inequality and the international exchange rate of the rupee — India's economy appears to be worse off than where it was two decades earlier. India is not in danger of defaulting on external financial obligations as it was in June 1991. Nor has Mr. Singh's government mortgaged the country's gold to the Bank of England as it did then, but nevertheless the current financial standing of the country is at best quite disconcerting.
In July 2004, a little after the Congress-led United Progressive Alliance (UPA) government came to power, the finance minister, Palaniappan Chidambaram, while presenting his budget referred to economic fundamentals as being strong and the balance of payments robust.
The prime minister added that fiscal prudence and financial discipline would remain the overarching objective of his government. After almost a decade of managing the nation's finances, some of those early intentions are no doubt haunting Chidambaram.
For good reasons, when he took over in July 2004, unlike many other governments, the UPA inherited an economy which was in good shape. Gross Domestic Product or national income was 8.1 per cent in 2003-04, average annual inflation was a reasonable 5.4 per cent, the Balance of Payments (BoPs) was strong then with three consecutive years of surplus, there was an accretion of $38 billion to foreign exchange reserves and another key ratio — short term debt to GDP — was at just 3.9 per cent. Moreover, foreign exchange reserves were higher than total external or foreign debt. Fast forward nine years and the contrast could not be starker.
GDP growth slowed to a decadal low in the year to March, average inflation has been close to double digits, external debt has zoomed to over $380 billion at a time when there is hardly any accretion to India's foreign exchange reserves. Besides, a high fiscal deficit and a record current account deficit have led to the rupee being battered. Worryingly, the proportion of short-term to total external debt has spiked from low single digits to 24.8 per cent of GDP by March 2013. In many ways, the slide half way through the nineyear tenure of the government mirrors the mid 1980s, when the Congress government lost its way after an initial burst of reforms.
It then led to huge commercial borrowings overseas and an expansionary fiscal policy which finally led to the crisis of 1990-91. What makes the economic management of the UPA worse is that it has botched up despite receiving record portfolio inflows in the last couple of years and the first half of this year, and the tide of global liquidity during its first term in office. And more so with a perceived team of A list fiscal managers at the helm led by Manmohan Singh, an economist, Chidambaram, a statistician, Montek Singh Ahluwalia, the former IMF Division Chief as Deputy Chairman of the Planning Commission and C. Rangarajan, a former governor of the Reserve Bank as Chairman of the PM's Economic Advisory Council.
But it is not a case of too many cooks spoiling the broth, or that Mr. Singh's economy team of Chidambaram, Montek and Rangarajan lack knowledge or are clueless on what to do. Given their collective wisdom, the nation's current trajectory has more to do with extraneous forces. It has for all appearances to do with the power sharing arrangement of the UPA and the overwhelming influence that the National Advisory Council has over government policies and their implementation.
It also has to do with the three-year stint of Pranab Mukherjee, who as finance minister is credited with worsening an already slowing economic situation, before he was moved up as President of the Republic. It is true that the government had to battle adverse global economic developments during the last few years especially high oil and commodity prices. For the financial year that ended on 31 March, India's GDP grew by 5 percent — the slowest in a decade.
This is particularly disconcerting for a government that has been emphasizing growth over everything else in its economic policy. Mr. Singh's government has always believed that growth would spur investments and savings, create more jobs, mitigate the adverse impact of inflation and propel India's "emerging economy" to the high-table of fast-growing nations. Unfortunately, none of this has happened. Savings and investments are down.
Investments by Indian businessmen abroad have overtaken foreign direct investment for the first time, even as the government desperately woos foreign investors and is nervous that international credit rating agencies will soon downgrade India. If that indeed happens, it would exacerbate an already-bad balance of payments problem. The government has lifted caps on foreign investment limits in various sectors, especially telecommunications. Chidambaram insists that the India "growth story" will return soon and that what the country is currently facing is a temporary aberration. But markets remain bearish and there are few signs of a revival in investments, both domestic and foreign.
For instance, in December, the government opened up the retail market to global supermarket chains in the teeth of opposition from not only its political opponents but some of its coalition partners who subsequently parted ways with the ruling Congress party. But the likes of Wal-Mart and Tesco are yet to announce plans to invest in India. India's current account deficit - the difference between the inflow and outflow of foreign currency - touched $33bn in the quarter ending December 2012, reaching a historical record level of 6.7 percent of the gross domestic product (GDP). Though the deficit has narrowed since, the situation is far from comfortable.
The deficit is also the principal reason why the Indian rupee has dipped to an all-time low (12 percent) against the US dollar over the last month. Many believe that the single biggest failure of the government's economic policies in recent years has been the inability to control inflation in general and food prices in particular. High food prices have hurt the poor much more than the rich or even the middle classes, simply because food constitutes a larger proportion of total household incomes the lower one moves down the economic ladder. The Food Security legislation — a modern-day variant of the food for work program run prior to the last elections — is seen as another cynical tool to woo the electorate. The government says the worst is over and that the economy will revive in the near future. The problem is that their optimism is shared by few.