The economy today seems to be where it was in 2013-14, during the dying days of UPA II and just before the Modi government stormed to power. The rupee is plummeting rapidly and doesn’t seem to be bottoming out any time soon. Global crude oil prices are heading north and no one knows just how far they will go. Exports are stagnant, the current account deficit is ballooning, and private investments are stuck in a rut. The IL&FS crisis has only added to the sense of gloom and doom.
Despite this, GDP growth is topping 7 per cent, with the IMF’s recent bullish forecast giving the Modi government something to smile about. Not surprisingly, both the Finance Minister and the Prime Minister recently crowed about the bullish growth prospects of the country despite pressures from several fronts.
Fuel price rise
With the general elections just a few months away, it is the rising oil prices that are beginning to sting the government. Having benefited immensely because of a benign price regime from 2014-17, during which the government happily raised various taxes on fuel and raked in the moolah, it now feels the pinch as prices started to harden early this year.
When global oil prices were low, the government systematically raised taxes to shore up its revenues and keep the fiscal deficit under check. The price of fuel is now rising so rapidly that there are fears a litre of petrol will soon touch ₹100. In India, taxes of various kinds, both Central and State, form almost 50 per cent of the price of fuel. State taxes vary — from a low of 16.6 per cent in Goa to 38 per cent in Maharashtra. So, States have also immensely benefited from the fuel windfall.
On the global front, US President Donald Trump’s sanctions on Iran, a major supplier of oil to India, has not made life easier for Indians.
To stem the fall of the rupee, the government initially came up with a few measures such as curbing imports of ‘non-essential’ items, and boosting exports. After resisting the pressure on the fuel front so far, Finance Minister Arun Jaitley announced a set of measures to ease the burden on common citizens last week. This included cutting the Central tax on fuel and asking the oil marketing companies to share the burden. He also urged State governments to cut taxes on fuel.
The market’s reaction was savage. Stock prices, especially those of public sector oil companies, plummeted and investors saw a massive cut in their wealth. Global investors, who were already pulling out their money from the India markets in the recent past, now fear that the Modi government is reversing the clock and going back to the ‘administered pricing regime’ for fuel.
Congress leader Mani Shankar Aiyar, who headed the Oil Ministry during the UPA I regime, could barely hide his glee, in a recent newspaper interview, at the Modi government’s predicament. He was candid in dubbing the government’s recent measures to aid the citizens against rising fuel prices as an “UPA formula”. For good measure, he also took a dig at the Finance Ministry mandarins for rubbing their hands in glee every time global oil prices rise as they end up gaining a windfall in tax revenues.
Same tricks
So, the government today is facing the same kind of pressures, both on the domestic and foreign fronts, that the UPA government did during its “lame-duck years”. And as several commentators have pointed out, this government’s handling of the situation has not been very different from that of the UPA’s.
The Modi government did implement several market-friendly reforms, including the ‘Make in India’ scheme and the focus on ‘ease of doing business’, hoping that the industry would take the bait and revive investments. But private investments have stubbornly refused to gather momentum in these four years. As Crisil Chief Ashu Suyash said recently in a newspaper interview, with capacity utilisation stuck at around 70 per cent, the industry is unlikely to come up with fresh investments any time soon.
This brings us to the larger question of the range of policy options that governments these days have in handling economic crises. The hard reality is governments, with their globally-integrated economies, don’t have a great many options when they are buffeted by global headwinds over which they have very little control. UPA’s “economic mismanagement” was a major electoral plank on which the NDA came to power and, today, the same charge can be levelled against it, and it’s hard to miss the irony.
Maybe the time has come for a serious bipartisan approach to handling economic issues rather than the two major political parties — the BJP and the Congress — taking pot-shots at each other. It’s also time economists put on their thinking hats and started coming up with new and innovative policy options to deal with the economic problems the country is currently facing.