Chidambaram's one year report card: More misses than hits

Firefight, rescue, salvage, reclaim, reboot, these were some of the words that were used a year back when P Chidambaram took office at North Block, as the Indian economy was starring into an abyss. It has been an eventful one year in office. He has managed to rein in the fiscal deficit, he got the parliament to approve the foreign direct investment (FDI) in multi-brand retail policy and he bit the bullet as far as diesel and gas prices were concerned, a year after all those measures there are concerns about the economy and of course the number one concern continues to be the current account deficit (CAD).

Also read: Will limit twin deficits; 6% growth achievable: Chidambaram
There are new sets of challenges that Chidambaram is going to have to deal with, a spiraling rupee, a hugely volatile stock market, major foreign investors like Posco and ArcelorMittal pulling the plug on India and high interest rates. So how does the Finance Minister one year report card look like? Shereen Bhan, Managing Editor, CNBC-TV18 evaluates Chidambaram’s performance over the past year and challenges he would face going ahead with a panel consisting A K Bhattacharya of Business Standard, Gaurav Kapur, Senior Economist at RBS and R Jagannathan, Editor of Firstpost.
Bhattacharya believes that biggest challenge for Chidamabarm going ahead would meet his fiscal deficit target of 4.8 percent. Considering the high trade deficit, sharp rupee depreciation, slowdown in industrial growth it is increasingly looking difficult to achieve the target. Agreeing to him Kapur said that implementation of Food Security bill will add to subsidy bill adding to fiscal pressure.   
In order to seize the widening current account deficit the government is now considering to hike import duties on certain luxurious goods, however Jagannathan stressed that such items have a very limited space in imports and hence may not help much. He expects corporate investment to remain stalled until election in 2014. Recent hike in foreign direct investment limit in various sectors is also not likely to bear any fruits.   Below is the verbatim transcript of the discussion Q: A K Bhattacharya, let me come to you on that issue of sovereign bonds, NRI bonds, further liberalising external commercial borrowings (ECBs) etc. Yesterday in the commentary of the Reserve Bank it was absolutely clear, the Reserve Bank is not in favour of sovereign bond issue. In fact, we spoke with the State Bank of India (SBI) chairman Pratip Chaudhuri, he said he is not in favour of either of sovereign bond issue or even an NRI bond at this point in time. But yet the Finance Minister today and perhaps most categorically today stating that talks are underway with long-term investors, as sovereign funds and pension funds and they are in consultation with the Reserve Bank there will be measures to attract longer-term NRI funds as well. So keeping that issue alive whether or not they actually go ahead with that is a separate story, but this seems to be the big disconnect between the government and the Reserve Bank? Bhattacharya: Certainly, this is a big disconnect and it only shows that the Finance Minister and the Finance Ministry continues to be obsessed with the idea of meeting a gap instead of trying to create condition by which the gap is met over a period of time. So instead of focusing on meeting the gap if the government were to create conditions by which investment picks up and the economic activity is expedited and that meets the gap that would have been a more sustainable long-term approach.
After all by going in a long-term sovereign bond borrowing or NRI bond even if we manage to achieve that, it doesn’t take away the gap, the gap remains. So every month you have a gap of USD 5 billion, so how do you keep meeting that gap and how do you keep talking about the rupee and keep the rupee strong. There is a limit to talking up the rupee. So at some point the obsession with keeping the rupee strong has to give way to making and bringing in place sustainable policies that actually meet our long-term problems, resolving the long-term problems. So, I see the Finance Ministry is continuing to be focusing on trying to meet the gap without realising that the more important thing is to take decisions, take policy decisions by which the gap doesn’t exist. Q: AK, let me start by asking you that and this was part of the speech made by the Finance Minister today, this was part of the meeting that the Prime Minister had with Indian industry as well. The Finance Minister is saying that Indian industry specially large industrial houses must rediscover the sense of optimism and confidence that I find in the agriculture sector. I understand that the Prime Minister’s message was also the same that India Inc has talked itself out of the recession, time is now ripe for India Inc to talk itself out of the recession. India Inc is saying you guys need to get a reality check. So, this business of trying to get India Inc to talk itself out of the recession, what do we make of this? Bhattacharya: If you take India’s economic policies back to the 1980s, the India Inc will not regain its confidence in the Indian government or the Indian economy. If you don’t understand the basic, the difference in using import duty and using the exchange rate policy to make your economy more competitive or ward off any crisis, the kind of crisis that you are foreseeing I don’t think India Inc will be encouraged.
So, if you are talking about raising import duties on luxury goods instead of allowing the exchange rate to play that role surely this is not a confidence-boosting talk. So, I don’t blame the Indian industrialist at all and as long as Indian Industrialist don’t have the confidence and the investment they make in India you don’t expect the FDI policies to work either because the foreign investor is looking at the Indian entrepreneurs, Indian companies, what they are looking at in this scenario. So whatever maybe your FDI policy initiatives those initiatives will not be able to yield the kind of benefits that otherwise they would have unless the Indian entrepreneurs, the Indian industry actually regains its confidence and faith in the Indian economy and the Indian government. Q: In terms of the possible options ahead of the government specifically and the Finance Minister very categorically today saying that there will be compression as far as imports are concerned especially on luxury goods, non essential import items and this has been a suggestion made by industry as well that there should be a hike as far as import duties are concerned. Is that really going to alleviate the problems that we are facing as far as the current account deficit is concerned? Jagannathan: The share of these kinds of items in the total Import Bill is very small. So, they will be useful as indicators and signals but they can't stem or narrow down the current account deficit and your financing needs of nearly USD 80-100 billion over the year. So, that is not going to help beyond symbolic reasons. You can for example completely ban gold imports except for exporters, that would be even stronger compression but it will again send a panicky signal which will send the rupee down and the same thing what the sovereign bonds thing which the finance ministry is talking about and the Reserve Bank of India (RBI) very clearly is again sending a panicky signal. When you got USD 260-290 billion of reserves you talk of a sovereign bond issue, it’s the same pie in the sky kind of attitude which is going to send the wrong message that you are panicky and you are worried about reserves just disappearing. They were just talking in the air, some six months back they were talking about a sovereign wealth fund when your total external debt is USD 400 billion and things like that. It doesn’t make sense; I don’t know what these guys are talking about. Q: Do you believe that even after the amendments that are proposed to be made to the retail policy we are going to see money coming into India till the next elections? Jagannathan: You have the answer in your own question because the basic problem is people do not know what is going to happen till 2014. So, in the context where there maybe a big political shift and all the opinion polls are showing that the Congress is going to lose heavily so in that kind of a context to expect any kind of policy continuity, nobody is going to change anything dramatically but they don’t know the shape. If you are going to have a third front government in power, so, that is a completely new cattle of fish. So, you got to figure out. People are waiting for that, it is not because they don’t have confidence in Chidambaram but they have no confidence that he might be the Finance Minister after 2014. So, in that kind of context why would you want to risk investing now when you can wait till 2014 that is what is happening. So, all the foreign direct investment (FDI) moves will not bear any fruit. Q: Let me come to you in terms of what are the alternatives ahead of the RBI and the finance ministry at this point in time? This obsession with keeping the rupee at a certain level even though they go to town saying that we are not looking at a particular rupee as far as the currency is concerned, but what are the alternatives at this point? PSUs to borrow abroad, further liberalization of ECBs, perhaps an NRI bond or not whether or not there is appetite in the market for such a product at all we don’t know, but what could the alternatives really be? Kapur: Let me first of all say that we have already seen since August 2011 we have seen the rupee weakening from 44 to 60. So, RBI and the government are clearly at this point in time – while the argument that we should not be worried about the rupee perhaps was valid when we were at 53 but when you are at 60 and all the negatives are priced in I don’t think that is really now a question. I think RBI had to do something and going ahead from RBIs perspective they have already taken some fairly severe steps. On account of those tightening measures we have seen short term rates spike up fairly sharply. It’s a dynamic situation being driven by the fact that the US Federal Reserve is going to start tapering sometime this year and there is a general flight of capital from emerging market asset classes too. Q: On this issue of the US Fed beginning to taper off and all estimates and a CNBC global poll at this point in time also seems to suggest that Fed will begin to taper in September, but look at the statements coming in from the government. Yesterday it was Raghuram Rajan, today it is the finance minister categorically stating that they don’t believe that the Fed will begin to taper come September or anytime in the near future. Either they know something that we don’t know or they have had a private conversation with Ben Bernanke, what do you make of this? Kapur: It's hard to say why they are saying so, but Fed has made it very clear that they will at some stage be considering tapering not tightening. In fact Fed itself is now trying to kind of use a more measured language. We will have to except the fact that this will happen if not in September then may be down the line. So, that is something which you need to take as a given. With all emerging markets already kind of behaving by raising interest rates I think it is only time that the RBI reacted as well because they did wait for a fairly long period of time before reacting. So, going forward the other big challenge is ofcourse the current account deficit (CAD) and current account deficit being at a level much higher than a sustainable level where there are a lot of structural factors at play, where depending on what you look at especially say in terms of gold imports it’s a lack of financial inclusion, its high level of inflation which has driven demand for gold.
In case of coal it’s an issue with capturing the coal in the country itself and in case of oil that is where some progress is clearly being made. So, given these challenges RBI has done what it had to do and if the pressure persists then they might have to go in for some more tightening. Q: Let's do the math because Chidambaram saying red line, I will meet the fiscal deficit target and I will ensure that the current account deficit is financed as well without drawing down from the reserves. They have also tapered down the growth target from 6 percent today saying we will do between 5.5-6 percent, saying that if oil subsidy we need to allocate more money we will take a call on that. We will met our disinvestment target, we will meet all the other targets that we have set for ourselves. But a lot of this is actually based on hope and optimism. Even though he has projected a revenue growth of 21 percent do you believe the fiscal math would add up? Kapur: It looks difficult. With the rupee where it is and under recovery in case of diesel is touching Rs 10 and oil prices have moved up as well by almost USD 5 per barrel and given the Middle East tension it looks as if oil prices will remain where they are. So, they will increasingly face a challenge in terms of meeting the fiscal deficit target. There obviously with growth slowing down – they assumed a 6 percent growth in the fiscal estimates and if growth slows down to 5.5 as what the RBI is saying or even lower then you have a revenue slippage as well.
Non revenue sources like disinvestment are always very difficult to kind of comment on.
Other than that this whole food security bill implementation will add to the subsidies.
So, it would again be a stretch and with the kind of pressure we have seen on interest rates already it will become increasingly difficult for the RBI to continue market borrowings programme at this level.
In fact the RBI governor today pointed out that with increase in short term rates, long end rates will also move up.
So, on one side banks are risk averse, so they are buying government bonds. But definitely this 4.8 percent number will become a challenge. At the same time to his credit the fact that fuel prices are being increased gradually - I think that helps. But it definitely would be a challenge if growth slows down and slows down sharply. If you come back at 5 percent level like last year then you will have revenue slippage as well. So, it would be difficult target to meet.