Economy Dec 15, 2012
The economy needs "bitter medicine," said Finance Minister P Chidambaram at a Delhi Economics Conclave on Friday. "There is no other way...".
Given plunging growth numbers, crashing exports and steady near-double-digits consumer inflation, who can argue with that?
So when Chidambaram says "this bitter medicine is good medicine. It will restore the health of the economy and next year we can look forward to much higher growth", nobody is likely to demur.
The only problem is this: he is talking more about bitter medicine than actually doing it. He is yet to convince his party to take the bitter medicine in the right dosage.
But after the first spoon of it - the diesel price hike and the cap on LPG cylinders announced in September - Chidambaram's party has been rushing for the sugary stuff, not the bitter part.
Even though the business media has been waxing eloquent about how the UPA has suddenly rediscovered its reformist spine, the fact is there is a conscious shying away from "bitter medicine" even in small doses.
Since September, in no sphere has Chidambaram chosen bitter medicine over the sweet stuff. Consider:
#1: The cap on LPG cylinders is likely to be raised from six to nine, indicating that one part of the bitter medicine already swallowed is being spat out.
#2: There is no talk of diesel price deregulation. Even while talking about bitter medicine yesterday, Chidambaram was piloting further fuel subsidies of Rs 28,000 crore for the oil marketing companies - and he will come for more as the year ends. And he is talking of taxing diesel cars instead or raising diesel prices.
#3: Given the deteriorating current account situation, Chidambaram has been trying to bring in the dollars by making it easy for foreigners to invest in domestic debt and for Indians to raise foreign debt - this is like storing up an external debt problem for the future. Sweet cures for now, bitter medicine later.
#4: No serious effort has been made to eliminate corporate tax loopholes to raise revenues. Instead, Chidambaram has been seeking to raise money from disinvestment (selling the household silver) and spectrum auctions (more silver). Government expenditures on subsidies are not being cut at all.
#5: Even when it comes to disinvestment, Chidambaram has taken the easy path of using the Life Insurance Corporation to sell his wares. The finance ministry has unfairly allowed LIC to invest upto 30 percent in a single company against prudential, and the recent disinvestment of Hindustan Copper shows why this was done. LIC and public sector investors bailed Chidambaram out by buying the bulk of the shares offered.
#6: When inflation is still high, the government should curtail its deficits, but Chidambaram has been pressuring the Reserve Bank to cut rates to revive growth. Instead of taking the bitter medicine of cutting non-productive expenditures which will create space for a rate cut, he has been pressuring the RBI to cut rates anyway. Who wants difficult decisions, when easy ones are at hand? Rate cuts are just sugary placebos, and Chidambaram is happy to have that instead of the bitter pill he has been tomtomming.
#7: To cut down on subsidies, the government has to not only raise prices, but identify who is entitled to subsidies and who is not. But this is politically difficult, and no effort is being made in this direction. With elections in sight, Chidambaram has agreed to open the treasury to direct cash transfers - not exactly bitter medicine. The only way to make cash transfer work is to extend them slowly, after studying the results over a long period of time. But politics is about doling out the goodies, not administering unpalatable medicine.
#8: While moving parliament for supplementary grants yesterday, one of the items on Chidambaram's menu was cash infusion of Rs 2,000 crore into Air India. Chidambaram admitted that he was not happy about this, but was still going to give the airline the money to check a spurt in fares. When it comes to throwing money into the bottomless pit called Air India, bitter medicine is not even an option, it seems.
#9: The cabinet approved the land acquisition bill which will make land purchases for infrastructure and industry not only more costly, but cumbersome. Bitter medicine in this case would have meant telling Sonia Gandhi that this is no way to revive business confidence. But the cabinet, including Chidambaram, caved in and we have a land bill that CEOs are simply dead against. Instead of bitter medicine, business is being administered poison pills. The cost of the Navi Mumbai airport will rise by at least Rs 4,500 crore as a result - to give just one example.
The finance minister is right to call for bitter medicine, but he seems to like talking about it more than actually taking a spoonful himself or forcing his party to try some of it.