Winds of Change at North Block PC Tries to Crank Up Slowing Growth Engine

Big guns of India Inc, including Godrej & Parekh, cheer FM'spromises to act on fiscal deficit & inflation, and fine-tune policies to facilitate capital flows

    For a government long accused of being in a state of paralysis, new finance minister P Chidambaram demonstrated on Monday that it has at least regained its power of speech. 
After first confessing to deep economic troubles and listing them one by one, he promised that the government would now walk the talk as he committed it to a path of fiscal rectitude and clear, stable and non-adversarial tax policies — shorthand for junking some of the policies followed by his predecessor. 
Chidambaram, who took over as finance minister last Wednesday, also promised to create conditions for lower interest rates by cracking down on supply-side inflation, held out hopes for the mutual fund and insurance sectors, and vowed faster clearances for foreign investment proposals."Uppermost in my mind is the duty to regain the confidence of all stakeholders… Our policies have to be modified or fine-tuned in order to meet the expectations of different stakeholders," he said, reading out from a statement in his first comments since taking office. The statement, coming at a time the government has been pilloried domestically and internationally for some of its recent economic policies and inability to push ahead with reforms, did not contain specifics and Chidambaram refused to answer questions, saying he would do so after a few days. 
Initial responses to his comments were positive, although some chose to be guarded, preferring to wait for real action by the government. Many, however, said coming from Chidambaram, who is viewed by investors and corporate bosses as a reformer and an efficient manager, gave the statement some credibility. "At the present moment, the country needs some good news and the statement of the finance minister would be a major business sentiment boosting measure," said CII President Adi Godrej. India Inc Cheers Comments on Tax Proposals 
In the markets too, there was guarded optimism. Bond yields fell in response to his comments on interest rates while key stock indices, already up at the time on the back of a global rally, closed the day higher. 
"While the statement is general, it does outline the broad areas of focus. And given that the statement is being backed by the FM's past record, it will be seen positively by the market," said Jahangir Aziz, chief economist for India at JPMorgan, who has worked with Chidambaram in an earlier stint at the finance ministry. 
The statement by Chidambaram, on a day he met the Reserve Bank of India governor and coming after his weekend shuffling of key finance ministry portfolios, was seen as a clear attempt to project a different style of economic management from his predecessor, Pranab Mukherjee. 
The last few months of Mukherjee's tenure saw economic growth fall to 5.3% in the last quarter of the previous fiscal year and many independent economists have penciled in growth rates of less than 6% this year. 
"Hope is building up in the markets for action from the government's side. But the only positive for markets will be real policy action," said Sudhakar Shanbhag, chief investment officer at Kotak Mahindra Old Mutual Life Insurance. Besides his commitment to "a path of fiscal consolidation" at the very start of the four-page statement, the comment that drew a lot of attention was a clear message that he would not shy from reviewing some of the contentious tax proposals of his predecessor. 
"I have also directed a review of tax provisions that have a retrospective effect in order to find fair and reasonable solutions to pending as well as likely disputes between the tax departments and assesses," Chidambaram said. His comments were widely interpreted to mean that the government would seek a compromise solution in the multi-billion-dollar tax tangle with Britain's Vodafone Group Plc. 
The chairman of Vodafone in India, Delhi-based businessman Analjit Singh, drew heart from the finance minister's comments. "I am really really glad that what to some extent became a manmade problem for us and caused the sentiment to become marginal as expressed in FII and FDI inflows, the weakening of the rupee, sluggish markets etc are top priorities that Mr Chidambaram once again as finance minister is looking at," Singh told ET NOW. The finance ministry under Mukherjee had brought in a retrospective amendment to the tax rules in this year's budget to force Vodafone to stump up the tax, despite the company having won a case in the Supreme Court that spared it from having to pay. The finance ministry's actions were slammed as antiinvestor and drew interventions by overseas lobbies and foreigngovernments. "India needs a rational and transparent tax regime. Investment is drying up… In this context, the FM's statement is most welcome," said Deepak Parekh, chairman of HDFC. The government has already put on hold another of its contentious tax proposals – the General Anti-Avoidance Rules (GAAR) – and has appointed a committee of experts to look into it. 
While industry mostly welcomed the new finance minister's moves on the tax front, they attracted sharp criticism from BJP's Yashwant Sinha, who accused the government of "trying to hoodwink the people of India and the world". "For P Chidambaram to say he would review the measures and be fair, and exchanging the revenue and expenditure secretaries is not correct. There cannot be a situation where they succeed in giving the impression that they are rolling back actions of their own government. Disowning their own decisions is a luxury they cannot afford," said Sinha, a former finance minister in the NDA regime. 
On Monday, Chidambaram also announced the creation of another committee of experts, this time to help with formulating a path of fiscal consolidation in a few weeks. This committee includes leading fiscal experts who were part of the Thirteenth Finance Commission — Vijay Kelkar, Indira Rajaraman and Sanjiv Misra. The government has pegged fiscal deficit at 5.1% of GDP for the current year, a target that most experts say is difficult. A sum of Rs 43,580 crore budgeted for petroleum subsidies has already been exhausted in clearing last year's dues. Industrial production recorded a dismal growth of 2.4% in May and tax revenue collections have borne the brunt of a slowing economy, making Chidambaram's task of achieving fiscal consolidation a formidable one. 
Chidambaram said the burden of fiscal correction would have to be shared fair and equitably, with the poor being protected and others bearing "their fair share of burden". His comments were interpreted to mean that the government would muster up the political courage to crack down on subsidies. 
He promised to crack down on supply-side inflation by using foodgrain stocks available with the government to moderate prices and, if necessary, importing items in short supply. 
Underlining the need for fiscal and monetary policy to move in tandem, the finance minister also called for lower interest rates and said the government would work with RBI to ensure that inflation is moderated in the medium term. "Sometimes it is necessary to take carefully calibrated risks in order to stimulate investment and to ease the burden on consumers," he said, holding out the hope of some monetary easing by RBI if the government managed to show credible action on fiscal deficit.

Where are the Specifics? 
Political courage is what India now needs, to lead it out of tepid growth and investor trepidation. That cannot be supplied by the finance minister alone. So, even as P Chidambaram promises fiscal consolidation, is there any political backing for decontrolling diesel and urea prices, which lies at the heart of the problem? Or for scrapping obsolete coal nationalisation, from which stems power shortage, blackouts and darker scams? It is not enough for Sonia and Manmohan to put their best man in charge of finance. They must lead from the front, so that the government can take tough decisions.