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Economy Nov 26, 2012

Time running out as Chidu battles against odds

By Sourav Majumdar

Finance Minister Palaniappan Chidambaram's comment last week on India's growth trajectory should hardly come as a surprise to anyone. Chidambaram hinted at a growth rate of about 5.5 percent for the second quarter of FY13, the same rate recorded in the first quarter. The message from the finance minister was unequivocal: times are tough for the economy and the situation was difficult.

Chidambaram's comments, at a bankers' conference in Pune, come at a time when there is widespread expectation that things will continue to be difficult, at least for some more time before they begin looking up. The finance ministry reckons things will start improving on the growth front from the third and fourth quarters, though the overall estimate could still be in the region of about 5.5 percent for the full year. This, if it were to happen, would mean the slowest growth rate for the country in ten years.

Finance Minister P Chidambaram. Image courtesy PIB

After taking charge at a difficult time from his predecessor Pranab Mukherjee, Chidambaram did hold out some hope for the economy, attempting to fast-track reforms and trying to push through disinvestments. The urgency was justified: the UPA-II government hardly has time before the forthcoming Union Budget and the pressures of the next general elections would also be upon it soon enough. There was clearly merit in trying to get the economy back on the rails as soon as possible.

Cut to November-end 2012, and Chidambaram's plans seem to have come up against a series of odds. The finance minister, who unveiled a fiscal roadmap just a day before the Reserve Bank of India brass was to undertake a mid-year of its monetary policy in October, saw the RBI sticking to its stand of not lowering the key repo rate owing to stickiness in inflation. Instead, RBI lowered the cash reserve ratio (CRR) again, to allow more funds to be lent by banks. But interest rates were not brought down, dashing the finance ministry's expectations.

Chidambaram, who was keen to garner revenues by way of the relatively non-controversial disinvestments route, has also come up against problems on that front too. While the much-awaited disinvestment process got under way with the Hindustan Copper share sale, which garnered Rs 800 crore in the first tranche of 5.6 percent, it's early days yet and it remains to be seen whether the government's Rs 30,000 crore disinvestment target can be met.

While the Hindustan Copper share sale went off smoothly with more than a bit of help from Life Insurance Corporation and banks, unlike in March when the ONGC issue had to be bailed out, fresh problems seem to have cropped up on disinvestment of some other companies.

A report in The Economic Times on 26 November says the oil ministry has expressed reservations about the disinvestments in Oil India and Engineers India, given the fact that the Hind Copper sale was also largely taken up by public sector institutions. The report says the oil ministry now wants other two other issues to go through before these companies come up with their issues. The Hind Copper offer for sale was also made at a considerable discount to the market price, and the Oil India disinvestment has already secured cabinet approval. However, the oil ministry's stance has made things tough for Chidambaram.

Analysts have also begun understanding what the finance minister is up against, despite the initial promise. A report on the economy by broking house Motilal Oswal says it has 'reassessed' the growth outlook for FY13 and FY14, and now pegs FY13 growth at 5.2 percent, down from its own estimate of 5.8 percent. FY14 growth has, however, been estimated at 6.5 percent by the broking house.

Among the major points it makes to justify its assessment is the fact that the services sector is also pointing to a slowdown in consonance with the trend of the last five quarters. Each component of demand - consumption, government expenditure, investment and net exports are seeing a slowdown.

"Though government made a sincere attempt to revive the policy engine, much remains a work in progress. Monetary policy, after some easing in the first quarter of FY13, is hardened in stance," the firm says.

Chidambaram has expressed the hope that with inflation declining, RBI may get an opportunity to reduce rates now. RBI itself had talked about such a possibility beginning January. That could be one rare silver lining for the beleaguered finance minister.

by Sourav Majumdar

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