Having obtained a strong endorsement from the people across the country, the new Congress-led UPA coalition’s immediate priority will have to be to reverse the economic slowdown and also give long term policy directions to economic reforms. Fortunately, this time around the government’s reform process would not get bogged down by the ideological opposition from the Left parties, which provided crucial support to the last UPA government. There should be a two-pronged approach — short term measures against economic slowdown and long term initiatives on important economic reforms. There is no need for another stimulus package as the earlier-announced two packages have cut the central excise duty by 4 per cent, allocated an additional Rs 20,000 crore for non-plan expenditure and allowed the raising of Rs 10,000 crore for infrastructure projects.
While the government should continue to strictly implement these measures, it should urgently bring down the cost of funds in the economy by lowering the RBI policy rates by at least 200 to 300 basis points. This will soften the overall cost of funds in the financial system significantly helping all sectors of business and industry. Lower cost of fund will help in investments and assets creation and also boost the consumer demand for goods and services. One thing is certain: the leading developed economies in the world will take a long time to recover from the current recession. So, we should focus more on the turnaround of our domestic market which in any case accounts for nearly 80 per cent our GDP.
The government’s long term measures, on the other hand, should focus on reforms. The process of judicious PSU disinvest should begin earnestly. This will not only help the government raise funds by selling its shares but will also make the PSUs more accountable to the investors. Raising of foreign holdings in insurance companies to 49 per cent from the present 26 per cent is another important and long pending promise of the Congress party that must be fulfilled. The government must also take expeditious decisions on policy issues like foreign investments in retail, consolidation in PSU banks by merging them, labour sector reforms, allocations of spectrum to telecom companies, etc. A quick pro-reform action plan will send positive signals to the market and also to foreign investors helping reviving the depressed sentiment in the economy.