Union Budget 2014: Shattered economy’s revival will need bitter pills

What Modi and Jaitley must remember is that the BJP was elected on the promise of economic growth, more jobs, and better governance.

The first big challenge for the Modi government is almost upon us – the Budget. Naturally, expectations from all quarters are high, since everyone – whether it is corporate India or dispossessed India or aspirational India – has their own interpretation and expectation of the promised ‘achchhe din’.

The biggest problem is that the Indian economy has for so long been following a socialist model that the ‘sarkar as mai-baap’ mentality has seeped into the majority’s mindset. It is only the post-1991 reforms and then the opening up and growth of the economy under the Vajpayee Government that has, to some extent, inducted a free market thinking. The UPA Government had the opportunity to further extend that thinking but instead of using the easy credit going around to build the basis for a long-term sustainable industrial base, it preferred to revert to its socialist origins with humongous welfare programmes such as the NREGA and the Food Security Bill that have sent Government finances into a tailspin.

The fiscal deficit for FY14 was 4.5 per cent of gross domestic product, only marginally lower than the projected 4.6 per cent, and is projected at 4.1 per cent for FY15. However, that number is open to question due to questionable accounting in the vote-on-account that P Chidambaram presented earlier this year. Already, the fiscal deficit number for FY15 is at the halfway mark, and this is only just two months into the fiscal year.

Clearly, Arun Jaitley has his work cut out for him — to keep the fiscal deficit at a low level. A higher fiscal deficit means that the Government has to borrow more, which means it sucks out more money from the market that could otherwise have been used for activities that would grow the economy. It is even more dangerous when the fiscal deficit increases in order to pay for welfare schemes that create neither jobs nor assets.

The growth of the Indian economy has slowed to a snail’s pace and inflation is burning a hole in the Everyman’s pocket. In such a scenario, it is not surprising that everyone is focused in reducing the fiscal deficit.

The Prime Minister has already warned of ‘bitter pills’ that will need to be administered to right the economy. Already, he has hiked railway fares, but he will need to watch out for rising oil prices that could drive fuel subsidies higher (more Government expenses and borrowing) as well as push up inflation (more pain for the voter).

US Republicans and supply-siders are fond of saying that deficits don’t matter and there is some merit to that argument as long as it drives growth. Indeed, that is considered by many to be one of the cornerstones of so-called Reaganomics. Developing nations such as India that are so heavily dependent on foreign oil and capital, run a current account and fiscal deficits, and are prone to both inflationary and exchange rate shock, however, need to handle fiscal deficit more carefully given the weakness of their economies.

Obviously, one of the more pressing reforms that the Modi Government needs to do is get rid of the fuel subsidies it pays public sector oil companies, except may be LPG and kerosene which are the lifeline of the lower-middle and poor segments of our society.

 

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