Problem is trust deficit, not twin deficit

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November 22nd, 2012 Santosh Tiwari

While concerns on the twin deficits – fiscal and trade deficit – are being raised across the board, digging deep into the developments in the last two years throws up a simple diagnosis and simple prescription for a remedy to the Indian economy.

Twin deficits are just the symptoms and the real disease is trust deficit, which the current government has created with little scope for redemption.

Why should Indian companies invest at a time when they are not at all sure about the policy direction in any of the areas? Similarly, why should a foreign investor choose this kind of a destination for medium- or long-term investment? Of course, short-term money chasing quick returns will always come, but is that the need of this hour?

The 2012-13 budget proposals including General Anti-avoidance Rules (GAAR) and retrospective amendments have just played the catalyst role in aggravating the situation which was already scripted by policy-paralysis.

The debacles on the 2G spectrum allocation front and failure in getting even one disinvestment proposal through this year up till now are putting immense pressure on fiscal deficit front. The goalpost for this fiscal has already been shifted from 5.1 per cent of GDP to 5.3 per cent of GDP. Clearly, even to achieve 5.3 per cent, nothing less than a miracle would be required.

This could have been possible but the trust deficit, both within the government and also that of the people on the government, is unlikely to help the cause.

The Winter session of Parliament beginning Thursday may provide another lease of life to the UPA government but it is all set to blunt its newly acquired reform drive as FDI in retail may not find majority favour during the impending discussion.

The larger question in this kind of an atmosphere is: should the economy be allowed to languish till 2014 Lok Sabha Polls the way things are going currently?

The prescription in favour of bringing growth and investment back to the track asks for a bitter medicine.

The UPA government has lost trust, if not of the people across the country, surely that of the investing community. This trust is hard to revive. A government running with the support of SP and BSP bears the possibility of getting pulled down any day.

The medicine then is – call it a day – go to the elections and allow this trust deficit to diminish. In the current situation, there is a possibility of a UPA-III or a Third Front government with Congress support if this government goes, besides the NDA option.

Whichever party comes to the power after the elections, will at least start without the trust deficit, and will have a better chance to be able to tackle the twin deficit, inflation and subsequently push the growth prospects.

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