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.
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.
