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Keeping one of the world’s fastest growing economies on track through a global crisis is a no small feat Pranab Mukherjee, India’s finance minister, describes trying to maintain strong growth while also ensuring fiscal responsibility in a developing country the size of his as “a balancing job”. When it comes to balancing, Mukherjee has just pulled off the economic equivalent of walking a tightrope in a hurricane.
Although India’s GDP growth rate slowed markedly – dropping as low as 5.3% for one quarter during the height of the downturn – it should bounce back to over 8.5% this year.
And while the stimulus the government injected directly into the economy during the crisis – the equivalent of more than $9 billion – drove the country’s fiscal deficit up to 6.8% of GDP, India has convinced capital markets that it has a realistic plan to bring it down to less than 4% in the medium term.
“We recognized India could not sustain demand on an export-driven strategy, and so we needed to generate domestic demand,” says Mukherjee. His ministry responded promptly to signs the economy was in autumn 2008 beginning to slow dramatically. It announced its first stimulus package – equivalent to $4 billion – in December and followed that up with a slightly larger intervention in January, then a third of about $800 million in February 2009.
At the same time, Mukherjee made sure that investors, politicians and government bureaucrats did not mistake the surge in government spending as anything but an emergency measure.
Instead, he put forward a credible plan to reduce the stimulus over five years. “When I presented my first budget, I made it clear that to maintain the demand we had to resort to this fiscal expansion, but it is unsustainable,” he says. “Sooner rather than later we would have to come back to the path of fiscal consolidation. We have done that.”
In June, Mukherjee demonstrated his reformist zeal by deregulating petrol prices, a move which, while domestically controversial, could reduce fiscal burden by 1.5% of GDP. The minister also spearheaded the government’s flagship anti-poverty measure this term with a food security bill that aims to provide grain, India’s staple food, to an estimated 80 million households that are below the poverty line. While Mukherjee is proud of the strategy he and his team implemented, India did have an advantage over many of its peers in the developed world, or in other emerging markets in Asia and the Gulf. “Our financial institutions of banking and insurance were not exposed to toxic assets,” he says. “They are largely regulated and controlled. A substantial amount of banking activities are in the domain of the public sector.” India’s banks were simply not allowed to take on the kinds of risks their counterparts in America and Europe did.
Mukherjee could also draw on his long service in government to help him steer India on a steady course during the economic crisis. The 74-year-old has been an Indian parliamentarian for five decades, during which he has earned a reputation as one of the Congress Party’s most capable political fixers. He is close to both Sonia Gandhi, president of the Congress Party, and Manmohan Singh, the prime minister. He has held a variety of ministerial posts – from defence to transportation – and was foreign minister immediately before his current post in the finance ministry.
When the Congress Party began its second consecutive term leading the India’s coalition government following the May 2009 elections, Mukherjee reportedly was offered the job of India’s home minister but chose the finance job instead.
The move represents a homecoming of sorts for Mukherjee. His first ever Cabinet-level position was as finance minister during the government of Indira Gandhi, from 1982 to 1984.