Pranab Mukherjee, named this weekend as India’s finance minister, will likely take advantage of the government’s stable majority to introduce measures to revive the economy amid a global slump. The 73-year-old Congress party veteran told the Economic Times yesterday the new government’s numerical strength would encourage credit flows and boost confidence. Mukherjee has been acting in the finance portfolio since January as Prime Minister Manmohan Singh, 76, recovered from surgery.
Mukherjee, who ran a closed economy as the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, inherits one that is now open and exposed to the worst worldwide recession since the Great Depression of the 1930s. He earned a reputation as a trouble shooter in Singh’s cabinet since 2004 by resolving spats among ministries and coalition partners.
“He is a deliverer,” said Alastair Newton, a political analyst at Nomura International Plc in London. “He will have challenges in the economic portfolio given the political realities -- market expectations are high.”
The Bombay Stock Exchange’s benchmark stock index surged by a record 17 percent on May 18, the first day after Singh’s re- election, as investors bet the resounding victory will enable the new finance minister to ease foreign investment rules and sell state assets -- policies that were stalled by Singh’s communist partners in his previous term.
Congress has the support of 322 lawmakers in the lower house of parliament, with the party getting 206 lawmakers of its own. That’s the most since 1991, when Singh as finance minister abandoned Soviet-style state planning and introduced free-market policies that have helped India’s economy quadruple in size.
The victory was as much Mukherjee’s as Singh’s. As the No. 2 in the cabinet, he backed the prime minister’s policies ranging from creating jobs in rural areas and writing off farmers’ loans to closer ties with the U.S., renewing a relationship that began in the early 1980s when he appointed Singh as the central bank governor.
“Despite the strong endorsement from voters, the finance minister may have a tough job pushing through some much-needed reforms,” said Nikhilesh Bhattacharyya, an economist at Moody’s Economy.com in Sydney. “It’s very hard for politicians, for example, to do away with subsidies, which may result in a backlash. Expectations should be tempered.”
India spends one trillion rupees ($21 billion), or a tenth of its budget, on food, fuel and other subsidies each year in a country where the World Bank estimates three-quarters of the people live on less than $2 a day. About 13 percent of spending goes to defense and 20 percent to pay interest on national debt. That leaves little for other needs, such as health, education and power plants, boosting borrowings.
The federal government budget deficit was at 6 percent of gross domestic product for the year ended March 31, more than double the target of 2.5 percent of GDP.
Moody’s Investors Service places India’s long-term local currency rating at Ba2, two levels below investment grade, and lower than the ratings assigned to Colombia, Romania and Kazakhstan. S&P has a BBB- long term credit rating on India, the lowest investment-grade level.
Investors will be looking at how much fiscal stimulus Mukherjee, who was on the boards of the International Monetary Fund and the World Bank in the 1980s, can provide in his first policy statement -- the budget for this year -- expected in early July.
Singh’s government said before the elections that stimulus of at least another 1 percent of GDP is needed to prop up an economy that’s growing at its slowest pace since 2003.
Mukherjee, who first became a minister in 1973, estimated in February that India may need to raise a record 3.62 trillion rupees from bond sales in the fiscal year that started April 1. The central bank governor Duvvuri Subbarao said May 22 that borrowings have “already expanded rapidly” and that it goes against his efforts to keep borrowing costs low.
“The government faces a challenge to balance two conflicting issues -- to stimulate the economy while preventing fiscal position from further erosion,” said Takahira Ogawa, S&P’s director of sovereign ratings. “There is a possibility for the government to implement various measures to further expand the economy and consolidate the fiscal situation.”
Singh’s administration, which doesn’t need communists’ support for a majority in parliament, could raise as much as $20 billion from sale of state-run companies, according to Rashesh Shah, chief executive officer of Edelweiss Capital Ltd.
Among the companies that could be placed on the block are NHPC Ltd., India’s largest producer of electricity from water, explorer Oil India Ltd. and fuel retailer Hindustan Petroleum Corp., according to Mumbai-based brokerage Religare Capital Markets Ltd.
Still, analysts such as Seema Desai at Eurasia Group, a London-based political-risk advisory firm, expect economic changes will be “selective and gradual.”
“There is a significant segment within the party that is suspicious of sweeping pro-market reforms,” Desai said.
Mukherjee, who last year successfully rallied China, Japan, Russia and 42 other nations to end India’s nuclear isolation and resume supplies without signing the Nuclear Non-Proliferation Treaty, needs to bring the same acumen to gain support of his party colleagues, many of whom are still tied to the original socialist principles of the Congress party.
At stake is a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non- state banks. The government also wants to allow global retailers such as Wal-Mart Stores Inc. into India.
“Mukherjee is a seasoned politician with excellent skills to bring people around,” said N. Bhaskara Rao, chairman at the Centre for Media Studies in New Delhi. “Expectations from him will be high.”
INTERVIEW WITH PRANAB MUKHERJEETwenty-seven years after he presented his first budget as the finance minister in the Indira Gandhi regime, and exactly a quarter century after
Euromoney magazine voted him as one of the best five finance ministers in the world, Pranab Mukherjee, Congress' man for all seasons and for all reasons, has returned to North Block. Here are excerpts for his interview with HNN, recently.
In the first week of July, he is expected to present the first budget of the new government. He is a remarkable man whose political career has been filled with achievements at the highest level. Through a political career spanning over five decades, he has graduated from being the unsung hero to the hero for both his party and government.
Apart from finance, he has held defence, external affairs, revenue, shipping, transport, communication, economic affairs, commerce and industry portfolios. Mr Mukherjee, who headed over 50 GoMs in the last government, speaks to P R Ramesh in an exclusive interview. Excerpts:
Is the worst behind for the economy?
The global economic crisis has impacted every economy in the world. We are no exception. But our economy has not suffered like the economies of Europe, North America and Japan. But we did suffer. And it was visible in September 2008. The government took steps to contain the problem.
The prime minister attended the G-20 summit and there he made it clear that protectionism is not the answer to the problem. He emphasised the need for flow of credit. India’s voice was heard. I remember the prime minister’s speech at the London summit. Everyone agreed with his call against protectionism.
Do you believe that economy needs a fresh stimulus? You had talked about the possibility of a third stimulus in your interim budget?
On December 7, 2008, and January, 2009, we addressed the problem from the monetary side as well as the fiscal side. RBI reduced CRR, LSR and repo rate to provide adequate liquidity to the system. On the fiscal side, we also undertook a series of measures. They have started having its impact. Although there is no strong rebound there are signs of a rebound.
Is economic recovery around the corner?
I am hopeful that we should be recovering by the second half of this fiscal. There are specific indicators that give me hope.
Any sectors where you may give some impetus?
We have to pay heed to those sectors which have been impacted the most. Exports and IT are among the most.
Will political stability help the government in tiding over the crisis?
I am sure it will have greater impact because of political stability. The impressive mandate for the Congress has created confidence in the market and there is expectation that the economy will bounce back.
There is expectation that there could be more reform-oriented initiatives
The first document on the government's action plan will be the Presidential address. This will contain the initiatives that we plan in the immediate and long run. And of course, the budget will be there before you in July.
Several sectors need immediate help. How will you step in and address their problems?
I indicated that states can spend 0.5% of GDP. But this spending was delayed because of the elections. The decision to buy 1,400 buses was one aimed at helping the automobile sector. Again this decision had to be deferred because of elections. Now the spending will begin.
Will the credit flow situation improve in the coming months?
Export sectors are badly hit by recession. But it is hit all over the world. The flow of credit has slowed down. Again political stability will work in India’s favour and credit will be available easily.
Are you not worried about the large fiscal deficit?
We have to find money for meeting the challenges facing our people. Extraordinary situations demand extraordinary responses. Fiscal prudence will have to kept aside for a while. This does not mean reckless spending. For the growth of the economy, you require money. The fiscal deficit is an area of concern.
We had to go in for large borrowings to maintain liquidity in the economy. We have had to burst the ceiling but it is not something that we can ignore.
There is a pause on the FRBM act but we will have to do bring it back on track in the near future within a year or two.
How will you address the burgeoning subsidy bill?
No developing economy can afford to say no to subsidies. They are essential. If crude prices go up to $ 140, you cannot pass it on to the consumer. But this issue will have to addressed and I will address it adequately. I repeat, my response will be adequate.
Isn't high food inflation worrying?
Food prices inflation is a cause for concern. But some corrective measures were taken before the elections. We had imported sugar duty free. This will soften prices.
What were your challenges when you were the finance minister in the 80s? And what lessons can you draw?
The responsibilities of the finance minister were very challenging even then, although they were vastly different. On the one hand, I had to push planned expenditure which was way below the target at only 26% of the target in the second year. We were facing balance of payment crisis and we had to pay back a $5.2 billion SDF loan from the IMF.
And I had to tackle problems arising out of a low inflation rate which had been brought down to 2.4% from 17.6% by my predecessor. We have to boost public spending today as well to give the required push to the economy and the inflation rate today is also at very low levels.
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