The broad contours of the next government should be clear
by the end of this week. It will take charge of a weak economy that has
lost momentum while being ravaged by high inflation.
The two major national parties have been selective in their
competing claims. The Bharatiya Janata Party has pointed out that
Manmohan Singh will leave behind an economy that compares poorly with
what he inherited from Atal Bihari Vajpayee almost exactly a decade ago.
The Congress prefers to focus on the average economic performance of
its governments since 2004.
The United Progressive Alliance cannot escape
responsibility for the mess that it leaves behind. It made several
strategic errors during its tenure. It hubristically misread the
economic boom to assume that India can continue to grow rapidly on
autopilot. The economic reforms agenda was thus put on the back burner
while the Reserve Bank of India came under attack whenever it tried to
cool down an overheated economy. The massive tax revenue pouring into
government coffers during the boom meant that all sorts of spending
plans were frontloaded on the public exchequer; the government is now
struggling to fund them. The cumulative spending on subsidies since 2004
has been close to Rs.12 trillion. Demand
was stimulated while a string of policy errors choked supplies. It is
but natural that the excess domestic demand fed inflation as well as
spilt over into the trade account.
Nothing captures the mismanagement of the economy as well
as the fiscal numbers do. India has by far the highest fiscal deficit
among the major economies even though the burden of public debt has
declined because of a high rate of nominal economic growth. A more
precise measure of the public finance mess is the cyclically-adjusted
combined fiscal deficit of the national and state governments as a
percentage of the potential gross domestic product (GDP). India is a
clear laggard. Much of the problem emanates from New Delhi rather than
state finances. Primary fiscal balances are lead indicators of
meaningful fiscal correction. India continues to report a large primary
deficit.
Some sceptics dismiss the importance of high structural
fiscal deficits. They are wrong. Fiscal profligacy has led to several
economic problems in India. The Indian central bank has often pointed
out the inflationary impact of high fiscal deficits. The large borrowing
by the government to fund that deficit reduced the domestic funds
available to the private sector. The policy response to this was to
encourage companies to borrow from the global markets flooded with cheap
credit by Western central banks; that has increased corporate
vulnerability to global shocks (though company managements are also to
blame for the dollar borrowing spree). High fiscal deficits fanned
inflation as well as led deterioration in the trade account. Households
poured money into gold as a hedge against rising prices as a result of
which financial savings needed to fund economic activity have shrunk.
These persistent problems are not just the result of a
failure of economic strategy but the natural corollary of the politics
of the ruling alliance, with its deep suspicion of economic reforms, a
lax attitude towards spending commitments and a clear preference for
subsidies rather than public investment. The political leadership is as
much to blame as the government itself. The economic failures of the
past few years are as much because of Sonia Gandhi as they are because
of Manmohan Singh.
The next government will inherit a sluggish economy,
persistently high inflation, an investment collapse and a public finance
mess. India was led into this quagmire because of a faulty political
vision. The way out then logically requires a new political vision
rather than more of the same. The economic strategy that draws from such
a new political vision should focus on attacking inflation, bringing
the investment cycle back of track, cutting subsidies and getting
serious about economic reforms. The key is not demand management but
more asset creatiON.
PRAVEEN SHARMA
PGDM 1ST YEAR
2013-15
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