Need of the Hour

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Capital markets are not going to stop falling till the government is able to provide some clarity about the way forward for the economy.
It’s as simple as that. And the government has a very small window of time to present its plans because if it keeps markets guessing as it shuttles from here to there to seek advice, there isn’t going to be much left to salvage.
Already reserves have dipped below $10 billion and the rate at which they are burning, with foreign aid frozen till the IMF program, is sorted out, they’ll be reduced to just a couple of weeks’ worth of imports very soon. The next stop after such crossroads is usually the default. We need only look so far as Sri Lanka to read the writing on the wall.
The first order of business must be reviving the Extended Fund Facility (EFF). For that, the subsidies holding oil and electricity prices down will have to go.
That is going to trigger inflation and a lot of discontent. Yet it is an essential step and not without a silver lining because it will reduce demand for commodities and cut energy imports, which will finally breathe some life back into the rupee and help the stock market recover its recent losses. And that should, slowly, bring prices down as well.
It’s also very important for the budget that will be presented in less than two months not to be a populist budget. If political considerations force the government to go all in and lace it with incentives, then the economy will simply implode.
No doubt this will trouble certain parties eager for a snap election, but this is the only way that the markets can begin to get a hint that things will be put on the right path soon enough. It is extremely important for the confusion to end and the government must swallow some bitter pills, take some hard steps, and make some stiff announcements right now.