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Big Bang reforms allowed P. Chidambaram to make a credible sales pitch

Big Bang reforms allowed P. Chidambaram to make a credible sales pitch during his East Asian roadshow. He told investors during the roadshows that the economy would expand at about 5.7 per cent this financial year.

Finance Minister P. Chidambaram Finance Minister P. Chidambaram
As 2012 drew to a close, it was difficult to miss an economic anomaly. Equity prices were surging and foreign institutional investors (FIIs) were pouring in money. However, it had no visible impact on the rupee-dollar exchange rate. The rupee remained weak and hovered around the Rs 55 mark, its level in August when P. Chidambaram became finance minister for the third time.

The drag on the exchange rate was India's widening current account deficit - the excess of imports over exports, which needs to be bridged by foreign capital or a country's accumulated reserves. In the second quarter (July-September) of 2012/13, India's current account deficit reached a record level of 5.4 per cent of gross domestic product and payments for purchases had to be made by dipping into reserves. Clearly, the economy needs to attract robust capital inflows to fund the deficit.

Some international banks then began discussions with the finance ministry to organise roadshows to court international investors and send out the message that the Indian economy was not adrift.

Chidambaram agreed to two roadshows, in Hong Kong and Singapore, in January. BNP Paribas, along with Citibank, hosted the Hong Kong leg on January 22, while Bank of America Merrill Lynch was the host at Singapore the next day.

It was an unusual time to be travelling abroad. In January, the finance minister is immersed in finalising the Budget. However, given the worrying macroeconomic indicators, Chidambaram understands the gravity of the situation. India is on the verge of recording its lowest growth rate in a decade in 2012/13 - Chidambaram told investors during the roadshows that the economy would expand at about 5.7 per cent this financial year. To boost investor sentiment, the government announced a slew of reforms in the run up to the roadshows.

The events were successful, reckon the hosts. "There was a lot of optimism, the feeling that the finance minister is on the right track," says Nikhil Johri, Managing Director and CEO, Asset Management , BNP Paribas. Reports put out by the other hosts echo Johri. Chidambaram exuded confidence about the outlook for the Indian economy but tempered it with a dose of realism. "He (Chidambaram) mentioned that behind the noise, there were quiet negotiations with Opposition parties and support from them," Bank of America said in a statement on the Singapore leg, adding that the finance minister believed that the biggest threat to the reforms process "is an unstable government in 2014".

Despite the upbeat mood, there have been sceptics. "Chidambaram is a smooth talker, he can give a spin to anything. He realises the need for investment, that is why he is doing a roadshow," says U.R. Bhat, Managing Director, Dalton Capital Advisors, an FII. Johri, on the other hand, believes Chidambaram wasn't engaging in empty talk. He had taken the trouble to boost his reformist credentials before the roadshow, he points out. "The intent had to be shown very early. It is very important to give confidence that government is intent on reforms," he says. "Unless you act, your message will not be taken seriously."

Some of the measures announced by the UPA government between January 9 and 17, in normal course, would have been part of Budget proposals. On January 9, Railway Minister Pawan Kumar Bansal announced the first increase in railway passenger fares in a decade - such announcements are normally part of the Railway Budget. This is being seen as an attempt to convince potential investors that Chidambaram would stick to his revised fiscal deficit target of 5.3 per cent in 2012/13. The railways' loss in the passenger segment in 2012/13 is estimated at a whopping Rs 25,000 crore There was more to come. On January 14, Chidambaram deferred the introduction of the contentious General Anti-Avoidance Rules (GAAR) by two years to 2016. GAAR proposals intend to check tax avoidance by entities. Then, on January 17, the Union Cabinet allowed public sector oil marketing companies greater freedom to link the retail price of diesel to its cost. The announcement holds the potential of reining in India's growing subsidy bill. In 2012/13, oil subsidies would be around Rs 72,000 crore, of which diesel usually is around 50 per cent.

Chidambaram's burst of reforms over the last six months have had a catalytic effect on equities. The Sensex closed around 19,941 on January 24, higher by 15.5 per cent since the time he became finance minister. The exchange rate was around Rs 53.77 to a dollar, around the same level when the first round of increase in diesel prices was unveiled and multibrand retail was opened to foreign direct investment in mid-September.

A weak rupee signals that India's economic problems are deep-rooted, say experts. India's slowdown is structural in nature and supply led, caused by the slow implementation of structural policies and infrastructure-related investments, says Leif Lybecker Eskesen, Chief Economist for India & ASEAN at HSBC Global Research. Roadshows alone, then, will not revive the Indian economy.

Additional reporting by Shweta Punj