Push for FDI

The finance minister has made several important points during his speech at the economic editors conference. He has reiterated that he will ensure that the fiscal deficit is kept at the targeted level, he has pointed out that the country is emerging as an island of relative stability in a world wrecked by financial turbulence, and he has acknowledged that inflation is a problem, and promised steps to contain liquidity. To be sure, he has made the ritual obeisance to growth by talking of a rise in business confidence, but the overall content of his message appears to have stressed stability. The point about India's relative financial stability is undoubtedly true, with economies across the world succumbing to financial contagion, and the finance minister's point has been endorsed by the world financial community, in the form of an increase in the Morgan Stanley Index. As a result, foreign institutional investor inflows to the country during the first fortnight of September have been positive. But will thestability continue? Capital controls will not alter the fact that our exports have already been affected. All the more reason, therefore, to ensure that financial stability is maintained. No finance minister has ever maintained that he will be unable to fulfil his targets, and Yeshwant Sinha is no exception. Tax collections so far have been far below target. The rollback of several budgetary provisions have already increased the deficit, and the samadhan scheme and the divestment process will have to make up for these shortfalls. The SPV route, however, gives a large amount of leeway to the government to make its own valuations about the shares being divested, which will determine the amount which the government realises. This will be a fudge, of course, but on paper the fiscal deficit would have been reined in. As far as inflation is concerned, the pressure on prices so far has come mainly from the supply side and has been restricted to agricultural commodities. But if the government is worried about theliquidity overhang, that would lead to monetary tightening, through either an increase in the bank rate or through a CRR hike. That should push interest rates northwards. But the government has already completed much of its borrowing, while the level of monetisation has been reduced, thanks to the inflow of the Resurgent India bonds. This is the time for the government to push for foreign direct investment in a big way, and the recessionary conditions in many parts of the world should see big savings in project costs.

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