Don’t Build Dams During Floods
Priyanka Venkatesh
Great Lakes Institute of Management
We all love optimism. It is always tempting to get carried away by the ever blissful sounding “growth story” of India and remain oblivious to the actual state of the country which is currently facing many macro economical problems of fiscal deficit, unsustainable subsidies, low growth etc. India has entered the storm of globalization without a lifejacket. The Indian democracy, the largest in the world, has not always been guided by the objective of maximization of growth. Instead, there have been many occasions when the government has misused fiscal instruments, most notably budget and fiscal deficits to capitalize on its political gain in order to retain power. This they have attempted to do through various scheme based expenditures which have no return possibility to the exchequer what so ever. In this sense, the politicians and voters in India, have been found to be somewhat myopic. The voters want immediate benefits from the political parties and the parties adopt short term populist measures and resorts to distributive politics in order to strengthen its support base. Such acts of economic desperation mostly backfire and undermine the long term growth of the nation. The predominant view in India is that the rise in inflation in the last few years is due to supply shocks -of oil and agricultural produce. But this is not true as supply shocks are short term and get automatically adjusted in the long term and are not responsible for long term inflation. Hence inflation that prevails for more than one period must be demand induced. However in India, the supply-shock inflation has cascaded in to long term core inflation. Also the fiscal policy of India over the years indicates that the government, due to ulterior political motives, spends more on revenue expenditure compared to capital expenditure.
Not only has the share of revenue expenditure increased over time but, even within revenue expenditure, substantial expenses have been on interest payments and subsidies. This increasing ratio of revenue v/s capital expenses indicates that more funds are being allocated for less productive activities leading to a slump in growth over time. In the meantime, the government is unable to contain its fiscal deficit to under 5% of GDP due to large slippages in the expenditure cuts announced during various budgets. In the wake of the global financial crisis, when western nations instituted expansionary monetary policies and inflationary measures, the Indian fiscal policy responded with counter-cyclical measures of tax cuts and increase in expenditures leading to increased prices and inflation. More money in the hands of people but no proportionate increase in output because of a lax in monetary policies (among other factors) heralded the beginning of a period of stagflation. Not enough efforts have been taken to address sustainable inclusive growth. In the future, the focus should be on monetary tightening, bringing in new tax reforms and targeting social expenditures by improving infrastructure, developing small and medium enterprise sector and by building skills. Collaborative improvements in the formulation
February 2013
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