Daunting tasks for Sitharaman

Subir Roy

The key tasks which will greet the new union finance minister have been fairly clear through the run-up to government formation, irrespective of who takes up the critical position.

What Nirmala Sitharaman does is bring her own set of expertise to the job. A professional with a stint before at the union commerce ministry, she will, in the manner of her predecessor, bring to the prime minister’s table both the imperatives for action and the choices available. And it is the PMO which will really decide on the action to be taken.

Analysts are more or less agreed that the economy needs a stimulus as the growth rate has been slowing down for several quarters now. After a slowdown in exports and investment, both public and private, it is now consumption expenditure which looks increasingly anaemic.

Public investment, particularly in key infrastructure areas, will likely pick up and private investment will likely get a rate nudge from a Reserve Bank of India that under its current leadership is usually ready to fall in line. But actual loosening of corporate purse strings will depend on the perceived robustness of consumer sentiment and the health of corporate earnings.

But while it is easy to ask for and maybe even get a stimulus package, what will simultaneously happen on the price front is another matter. The prospects of a normal monsoon and a decent kharif crop are still up in the air and most expect the current low food prices which have kept inflation low to creep up. So chances of upward inflationary pressure emerging do put a question mark over the contours of a stimulus package.

An equally important task before the finance minister is addressing the ill health in a large part of the financial sector. Public sector banks mired in bad debts is a malady that has been with us for some time now but a more immediate and urgent area of concern is the non-banking financial sector which has been cast into the throes of uncertainty ever since the quasi-government behemoth, IL&FS, defaulted.

Here also the key issue is not what has gone wrong but what needs doing. NBFCs must meet their commitments but that is easier said than done at a time when they are finding it difficult to roll over their borrowings whose costs are going up. RBI is unlikely to open a special window for them and a consolidation of the sector is on the cards. But that is inevitably a painful process and hardly recommended when businesses need easy access to loans, in order to be able to walk in step with a government-initiated stimulus package.

The next area of concern for Sitharaman is sluggishness in exports. Fortunately right now international oil prices are not acting up but they are intrinsically volatile. The last thing a new government needs is a combination of rising oil prices and sluggish exports, which will send the current account deficit soaring and the rupee plummeting.

In this area Sitharaman will find her earlier stint at the commerce ministry invaluable, particularly in handling the negotiations needed to address the bundle of issues relating to the US. The immediate challenge will be to get the US to reverse its decision to withdraw tariff concessions to Indian exports to the US under the generalized system of preferences (GSP) applicable to developing countries. To enable this India has to address President Trump’s perception that India is a very high tariff nation.

India has protested over newer US restrictions on the issue of H-1B visas, US tariffs on steel and aluminium and being put on the Special 301 watch list. The US, for its part, has complained about high Indian tariffs on motorcycles, agriculture, cell phones; India’s e-commerce policy, proposals for data localization; and price control on medical devices.

Independent experts feel that the best way to attain smooth trade relations is for the two countries to enter into a free trade agreement which will achieve reciprocity by addressing US concerns over tariff and Indian concerns over visas for professionals. So, long and arduous negotiations are foreseen.

We can go on but this is a daunting enough list to address in the first six months.  Even partial success over them will mark an auspicious beginning to Sitharaman’s stint at the North Block.

(Subir Roy is a senior journalist and author. The views expressed are personal.)