Chidambaram vows fiscal consolidation, inclusive growth

Fiscal consolidation and containing inflation will top the government's agenda over the next five years, even as it would doggedly pursue important financial sector reforms, finance minister P Chidambaram said today.

Addressing the 4th Delhi Economics Conclave, Chidambaram said, a ''faster, more inclusive and sustained growth strategy'' will continue to be on the agenda of the government over the next five years.

He, however, said these would require a wider consensus among the various political parties.

He said the country is experiencing the ill effects of the 2008 stimulus measures. While the various stimulus measures had initially helped to revive GDP growth rate from 6.7 per cent in 2008-09 over the next two years, it has since been declining, he pointed out.

''As (RBI) governor Rajan pointed out a few days ago, while the stimulus did help growth initially, it eventually led to an overheated economy, high inflation and wage growth, and consequently deficits widening to uncomfortable highs – CAD rising from 2.8 per cent in 2010-11 to 4.8 per cent in 2012-13 and the centre's fiscal deficit rising from 2.5 per cent in 2007-08 to 5.7 per cent in 2011-12,'' Chidambaram pointed out.

He said at the top of the list is fiscal consolidation and there would be no compromise on that.

''I speak for the government when I say there will be no compromise – on the decision to walk on the path of fiscal prudence and contain the fiscal deficit, step by step, year by year, until we reach the goal of 3 per cent of GDP in 2016-17.''

''India cannot finance a current account deficit of the order of $88 billion as we did in 2012-13.  Nor can India afford to pay for import of gold in the order of $50 billion or more.  Nor should India import coal when it has coal in abundance. Nor should India tie itself in policy knots and be forced to import goods and commodities that it has the capacity to manufacture or produce,'' Chidambaram said.

In fact, the country's current account deficit for the first eight months of the current fiscal (April-November 2013-14) touched $100 billion and could exceed $135 billion by 31 March 2014.

Chidambaram also warned against inflation, which, he said if allowed to persist over a longer period, will cost the country dear.

The current high inflation – measured by the CPI or the WPI – is driven by high food prices, especially prices of fruit, vegetables, meat, fish, eggs and milk. 

Sometimes, pulses and edible oils also witness sharp spikes in prices, he pointed out.

This, he pointed out, has been in part due to the higher farm gate prices for wheat, paddy, other cereals, cotton and higher rural wages the government provided.

He said farmers who grow these commodities are entitled to fair and remunerative prices to a fair wage and that the argument that inflation must be contained by suppressing farm gate prices or rural wages is a specious argument that ignores the needs of the poor and deserves to be rejected.

He said the use of monetary policy as a tool to fight inflation has limited possibilities as it is rather a blunt instrument available only to the monetary authority.

The answer to inflation, especially inflation in food articles, therefore, is to increase supplies and to radically transform the manner in which commodities and food articles are stored, transported, distributed and sold in the various markets, especially urban markets, he said.

There is also a need to deal wisely with harvesting and marketing and deal strictly with hoarding and profiteering, he added. 

The government, he said, has undertaken various financial sector reforms over the past few years, adding, ''In recent months, we have crossed several important milestones.'' 

The submission of the FSLRC report, the enactment of the new Companies Act, passage of the PFRDA Bill and making the pension regulator a statutory authority, bringing commodity futures market regulation under the finance ministry are important steps in this direction, he pointed out.

Financial sector reforms such as GST, the direct taxes code, the Insurance Laws Amendment Bill and the Uniform Financial Code can be game changers, he said, adding that all these require the building of a broad consensus. This, he said, is still a long way off.

However, when fully rolled out and operationalised, these will have profound implications for the Indian financial sector.

The task before India is to reverse these unintended consequences and lay the ground for faster, more inclusive and sustained growth over the next five years, he added.