Time for a clean-up act

Until the quality of finances improves and quantity of borrowing decreases, any chances of a turnaround remain muted
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First Published: Thu, Feb 21 2013. 05 28 PM IST
Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint
Updated: Thu, Feb 21 2013. 05 31 PM IST
Economic policymaking in India has reached a critical stage where any measure to correct one anomaly risks creating complications at the aggregate level. Any attempt, for example, to cut interest rates with the objective of reviving investment and economic growth can end up fuelling inflation and inflationary expectations. Any increase in demand can further aggravate the deficit on the current account, which is already at a record high and is expected to worsen before improving. The pace of output expansion in the economy is at its lowest in a decade and the government has absolutely no fiscal room to revive growth. If anything, the government is likely to cut expenditure, which will affect output in the short term.
It is well known that mismanagement of government finances is the primary reason for the current state of affairs. The rise in consumption expenditures in the form of subsides and social sector spending resulted in a situation where demand constantly outpaced supply by a wide margin, leading to persistent inflationary pressure. Higher inflation forced the central bank to raise the cost of money, reducing the rate of investment, which was also affected by higher government borrowings that pushed yields higher in the bond market.
It is true that the government has an obligation to protect all sections of society, but no government, just like households, can live beyond its means, forever. At some time profligacy will begin to hurt, and that time has arrived. But the worst part of the story is that expenditure will have to be contained and cut at a time when the economy is decelerating at an alarming pace. Further, since much of the non-Plan expenditure, such as defence and interest payments, have limited or no scope of adjustment, the burden of sacrifice will fall on the Plan part of the Budget, which will affect capacity creation.
However, these are not normal circumstances and expenditure needs to be contained, irrespective of the collateral damage in terms of growth. It is also necessary that a balance is maintained between Plan and non-Plan expenditure and some hard decisions are warranted on the non-Plan side, especially on subsides and social sector spending.
It is clear that until the quality of government finances improves and the quantity of its borrowing decreases, any possibility of a real turnaround will remain muted.
Can growth be revived without containing government expenditure? Tell us at views@livemint.com
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First Published: Thu, Feb 21 2013. 05 28 PM IST
More Topics: Economy | borrowing | GDP | budget | plan expenditure |
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