An agenda for the first hundred days

After the searing run-up to the general elections, the contours of the new government would be clear today. The new government should use the window of the first 100 days to garner low hanging fruit. There is a need to eschew the typically sterile debate and dissent in which the argumentative Indian excels.

Let’s take the farm sector first. The probability is high of an El Nino effect (which refers to a periodic warming of the central and east equatorial Pacific waters). Invariably, El Nino adversely affects the Indian South West Monsoon. With 50 per cent of farmland in rainfed areas, overall agricultural output could be hit in 2014-15.

Foodgrain stocks, as on April 1, 2014, were estimated at 38 million tonnes, way above the minimum buffer requirement. To the extent that there is a speculative increase in foodgrain prices, the government should aggressively sell its stocks in the market.

A water crisis looms large in the summer of 2015 as there has been rapid depletion of water in the 85 key reservoirs which will affect the availability of drinking water and hydro-power generation. This issue requires immediate attention.

Following the Urjit Patel Report there has been considerable criticism of the recent focus of the Reserve Bank of India (RBI) on the Consumer Price Index (CPI). The critics argue that the CPI is an inappropriate index of inflation as food items account for 50 per cent of the consumer basket.

To move to another indicator of inflation with a lower weightage for food items is like shaking the thermometer to get the desired reading.

While monetary policy, on its own, cannot control food inflation, it has a crucial role in preventing food inflation turning into generalised inflation.

It is unfortunate that most economists, government officials and industry all believe that a strong anti-inflationary monetary policy is antithetical to growth.

It is, in fact, stultifying to believe that low interest rates and ample liquidity are a panacea for attaining high growth. Such a paradise just does not exist.

The RBI governor Raghuram Rajan, last week in Switzerland, unequivocally stated that he sets out the monetary policy and the government has the power to fire him; he did indicate that he was happy to talk to government but ultimately the interest rate is set by him.

This statement is going to go down in history as the locus classicus on RBI-government relations.

The kind of autonomy the RBI needs is headroom to effectively execute monetary policy within transparently laid down objectives.

During the last 10 years there has been blatant interference by the government in micro-managing monetary policy; what is worse is that the government has resorted to frequent public criticism of the RBI’s monetary policy. The new government should eschew from micro-managing monetary policy.

The next monetary policy review is on June 3, 2014, and the RBI should have the freedom to formulate an appropriate monetary policy. The more enduring structural issues on monetary policy will be discussed in the next column.

There is no doubt a need to revive growth. This will, in the medium-term, require a step up in both savings and investments.

It bears reiterating that in India, over a prolonged period of time, the natural factor endowments have been wrongly priced resulting in less than optimal output.

Correcting this deep-rooted anomaly will require a fundamental change in macroeconomic management, which will take time.

The historical experience is that with the same level of savings and investment there can be different growth rates. In other words, in 2014-15, it should be possible to pluck the low hanging fruit with minimal efforts.

A stable macro-economic environment could favourably affect sentiment and encourage industry to step up output even with current capacities. In this context, a well designed programme to facilitate output in select sub-sectors of industry with strong backward and forward linkages is necessary.

In the early 1980s , a modest package of incentives to transport and infrastructure sectors led to a surge in industrial output.

Thus, pushing the growth rate up from the present projected growth rate of 5.5 per cent in 2014-15, by say 1.0 per cent, should be possible provided the new government offers a stable macroeconomic environment.

The regular Union Budget for 2014-15 would need to be presented in the next 7-8 weeks. What is required is not a larger Budget of a poorer quality but a smaller Budget with greater transparency. One would hope for a greater degree of decentralisation of fiscal activity from the Centre to the States, a rationalisation of foodgrain, petroleum and fertiliser subsidies and a stable investment environment. External sector management

From all counts, there would be an avalanche of capital inflows in the immediate ensuing period; this would swell domestic liquidity and generate inflation, unless immediate countervailing measures are taken.

The opportunity should be used to build up the forex reserves. Also, there should be a tilt towards longer-term flows rather than short-term flows and more foreign direct investment rather than portfolio investment.

In all this, it is essential that the exchange rate is not allowed to appreciate against fundamentals, as excessive appreciation will be detrimental to micro, small and medium industry.

After the grinding election campaign, it is vital that the country recovers quickly. As the author James Thurber said, “Let us not look back in anger, nor forward with fear, but around in awareness”.

The writer is a Mumbai-based economist