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A difficult year ahead

A difficult year ahead
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First Published: Wed, Jun 08 2011. 10 18 AM IST
Updated: Sat, Jul 02 2011. 03 43 PM IST
Excessive consumption has its consequences: It takes a while for the hangover to go away. The Union government is just beginning to feel it. The ill effects of injecting huge demand-side pressures are here to see. Fixing the problem requires a medicine the United Progressive Alliance (UPA) does not want to consume. This promises to be a difficult year.
Consider the sequence of events. Firstly, the government goes on a spending binge that powers consumption growth way beyond price stability. At the same time, it took no meaningful steps to push investment—the weakest link now in the “India growth story”—for this required political decisions it had no stomach for. This was followed by high inflation which the Reserve Bank of India is still trying to tame.
The results of all this are quite obvious at the beginning of fiscal 2011-12. On the one hand, growth is expected to come down to 8%. There is also the issue of the mix between consumption and investment growth—by the last quarter of fiscal 2011 this tilted very heavily towards the former. On the other hand, this is unravelling its efforts to keep fiscal deficit at 4.6% of the gross domestic product.
Some preliminary indicators are already at hand. Direct tax collections have come down in the first two months this fiscal. Though these are to be taken with a pinch of salt as refunds have a big impact on the net collection. On Wednesday, the chairman of the Central Board of Excise and Customs, too, hinted at challenges (read difficulties) in meeting the indirect tax target outlined in the budget.
The net effect is that even as growth slows, inflation remains high and fiscal slippages are on the horizon.
The only way out of this unhappy situation is to carry out reforms that attract investment. This would have allowed the government to continue spending in a sustainable fashion. The other way is to contract government spending. Both are not going to take place.
For one, the government has been at war with itself for a while. Key decisions—be they on pricing, environmental issues affecting investment, among others—keep on getting postponed. It is as if there is something within the UPA that is inimical to investment growth. If this were not enough, political turbulence seen in recent months has accentuated in the past week or so. This will constrict an already reduced political room for manoeuvre for taking contentious but necessary economic decisions.
What has caused the policy paralysis in the government? Tell us at views@livemint.com
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First Published: Wed, Jun 08 2011. 10 18 AM IST
More Topics: Ourviews | UPA | Power Consumption | RBI | GDP |