Wednesday, February 25, 2009

The great Indian fiscal mess from the dream team

India compared to other growing economies of the world must be doing better, but it is not so. India being import driven must be the least affected nation in the existing crisis. However, there are lots of internal problems that got magnified by external factors.

Recently, the Comptroller and Auditor General of India (CAG) published a report lashing out at the UPA Govt led by the dream team - Manmohan, Montek and Chidambaram. The dream team didnt do anything good, but ended up making things worse. For the first 3 years of their governance, there was a remarkable fiscal deficit management, much better than the previous NDA govt led by Vajpayee. However, inflation levels was not controlled and this was mainly due to food distribution problems and hoarding by private players. This created a very bad atmosphere and for the first time we imported wheat from australia. Adding to the woes, Govt discouraged small and medium scale businesses by diverting all the money to farm loan waivers which ultimately was caught in corruption. Although banks were involved in disbursal, there were too many rules that excluded a vast majority of farmers. This led to growing fiscal deficit.

Adding to this when signs of global recession began and money was slowly going out of India, govt began to increase interest rates and CRR. This led to increase in inflation rather than decreasing it. When things became worse, Govt followed FICCI to reduce interest rates and RBI began to cut CRR thereby infusing more money into the system. However, till then FDI levels were too good that protected us.

Once the global recession deepened, FII (direct money) was sucked out of the country that wiped away millions of investors assets. Then FDI slowed. Consequently, govt did nothing but allowed things to worsen. When both Europe and US fell into deep recession exports took a deep hit and govt did not do anything to help them. Jems, jewelery, apparel, textile, construction segments took a very bad hit. Nearly 5 million people lost jobs in these sectors. The infrastructure and road highway projects got entangled in issues like how contracts must be signed and executed. This delayed the allocated money spending. At one time industrial growth began to go negative after almost 10 years. And now, in the recent budget, govt decided to increase more money on social sector which is going a waste due to corruption. All this to win over farmers votes. The proposed tax cuts in excise and customs duty is going to do no better than take away money from the government.

These things have led to a big mess whereby fiscal deficit - one of the main strong macro economic factors to go very high as high as 10% of GDP which is the level of 1991 when India began to face its worst crisis. This is what you expect from the dream team. The reality of going 10 years backward while dreaming of going 10 years forward. All the claim of 9% growth is not rosy. Inflation was very high, consumer spending was low and income flow was low during this period. Now, when the growth is coming down instead of going up with the decrease in inflation, there is no confidence in the Indian consumer.

If fiscal deficit is not reduced, then we will surely end up in 1991 crisis. What are the ways of getting out of this mess?

I am not an economist, but can say that the govt must carry out disinvestment. By doing so they can generate billions of dollars domestically without even getting a dollar from outside. This will enable existing PSU to be competitive and also increase money flow into the market. RBI need not then intervene in manipualting interest rates. The same money could also be used in infrastructure by giving incentives to developers who finish projects within deadlines like tax breaks, bonus pay etc. The additional money can then also be used for other basic social programs. This way the govt need not depend on existing FDI resources to control the economy. Tomorrow, if for some reason FDI stops, india will be shattered. The Swadeshi approach will help us a lot. Govt should cushion export sector by giving financial support and take steps to increase consumer confidence domestically. Our banks are strong and they will continue to do so. The new rules of FDI policy will open doors for money, but will create competition which the country is not prepared unless roads and electrcity are in place. The govt must invest more in the private sector.

The foolish spending the govt is doing through the bureaucratic process neither helps in solving the problem nor helps in fiscal management. Govt is hiding a lot of things as claimed by CAG report as it is not accounting how it plans to spend all that it has claimed for.


jina said...


Industrialization is, I am afraid, going to be a curse for mankind. Exploitation of one nation by another cannot go on for all time. Industrialism depends entirely on your capacity to exploit, on foreign markets being open to you, and on the absence of competitors . . . India, when it begins to exploit other nations—as it must if it becomes industrialized—will be a curse for other nations, a menace to the world.

The future of industrialism is dark.

In the course of a few years the Western nations may cease to find in Africa a dumping ground for their wares. (12-11-1931)

I do not believe that industrialization is necessary in any case for any country. It is much less so for India. Indeed, I believe that Independent India can only discharge her duty towards a groaning world by adopting a simple but ennobled life by developing her thousands of cottages and living at peace with the world. High thinking is inconsistent with complicated material life based on high speed imposed on us by Mammon worship. All the graces of life are possible only when we learn the art of living nobly.

Whether such plain living is possible for an isolated nation, however large geographically and numerically, in the face of a world armed to the teeth and in the midst of pomp and circumstance is a question open to the doubt of a septic. The answer is straight and simple. If plain life is worth living, then the attempt is worth making. (1-9-1946)

God forbid that India should ever take to industrialism after the manner of the West. The economic imperialism of a single tiny island kingdom (England) is to day keeping the world in chains. If an entire nation of 300 millions took to similar economic exploitation, it would strip the world bare like locusts. (20-12-1928)

Industrialization on a mass scale will necessarily lead to passive or active exploitation of the villagers. Therefore, we have to concentrate on the village being self-contained, manufacturing mainly for use. Provided, there would be no objection to villagers using even the modern machines and tools that they can make and can afford to use. Only they should not be used as a means of exploitation of others. (29-8-1936)

My own view is that the evils are inherent in industrialism, and no amount of socialization can eradicate them. (29-9-1940)

I have the conviction within me that when all these achievements of the machine age will have disappeared, these our handicrafts will remain; when all exploitations will have ceased, service and honest labour will remain. It is because this faith sustains me that I am going on with my work. (30-11-1935)

What is industrialism but a control of the majority by a small minority? There is nothing attractive about it nor is there anything inevitable in it.

I claim that to industrialize India in the same sense as Europe is to attempt the impossible. India is one of the few nations of the earth which have witnessed the fall of many civilizations, herself remaining scatheless. My faith in her ability to solve the economic problem that faces her millions has never been so bright as it is today. (6-8-1925)

To make India like England and America is to find some other races and places of the earth for exploitation. So far it appears that the Western nations have divided all the known races outside Europe for exploitation and that there are no new worlds to discover. What can be the fate of India trying to ape the West? Indeed the West has had a surfeit of industrialism and exploitation. If they who are suffering from the disease are unable to find a remedy to correct evils, how shall we, mere novices, be able to avoid them? (7-10-1926)

I know that man cannot live without industry. Therefore, I cannot be opposed to industrialization. But I have a great concern about introducing machine industry. The machine produces much too fast, and brings with it a sort of economic system which I cannot grasp. I do not want to accept something when I see its evil effects which outweigh whatever good it brings with it.

We want industry, let us become industrious. Let us become more self-dependent, then we will not fellow the other people’s lead so much. We shall introduce machines if and when we need them. Once we shall have shaped our life on non-violence, we shall know how to control the machine.

Issacn said...

A simple spreadsheet analysis would tell you that a budget defict of 5% is not going to make much of a difference to both the loan/GDP or the rate of future growth in spending. That's if actual growth is around 6-7% and the nominal (money) growth is around 9-10% (assumes central taxes are 20% og GDP).

The trick is to transparently show that there is long-term stability of politics and success of investment policy. Government makes money from both financially viable businesses/ equity/loans, eg in case of power projects or economically viable investments, which generates taxable profits from the public, eg. metro, transport sector in general.

Government can get in the way of private borrowing (crowding out their share of funds) causing them to pay more for the lending. Government can systematically waste the deficit funding. With these concerns, Governments lose credibility if it hikes up the deficit.

India needs to divest inorder for the PSU to raise money to fund growth - eg. hydropower or steel or telecom. Defense PSUs are prime examples of inefficient and poor project management. Railways has shown (atleast in the past) an inability to create modern designs. Air India is an example of both misuse of services (or corruption) and not following a viable business plan (ie. giving away routes to foreign firms whilst planning linearly for growth!!).