With the Indian economy floundering, it is time for the government to step in to assuage fears through credible statements and support demand through public spending. That is what other governments are doing across the world. Neither of the options is available to the United Progressive Alliance (UPA) government right now, thanks to nearly five years of hubris and mismanagement of public finances.
The economic boom that is now ending emerged from two sets of factors: the tough economic reforms by three governments since 1991 and the global boom fed by cheap money. High growth and soaring tax revenues presented the UPA regime with a superb opportunity to push through more reforms and balance the budget, so that India could be ready for the inevitable downturn. The opportunity was missed.
Jayachandran / Mint
So now all that we have are homilies about how the government will do all it can to beat the slowdown. But the UPA government—especially finance minister P. Chidambaram—has said so much and done so little these past few years that such public statements carry little weight. Chidambaram has, at various times, taken credit for the spurt in economic growth during his watch, told the world that the success of the scandalously overpriced Reliance Power share issue was an indication of confidence in the Indian economy and insisted that India would be only marginally affected by the global crisis. His ministry’s battle with the Reserve Bank of India on whether or not to control the pro-cyclical capital flows flooding the Indian economy in 2006 and 2007 is well known. There are no prizes for guessing who was on the winning side of that debate.
What is now offered as policy is really a set of disjointed and worrisome actions. You have the Prime Minister offering the disingenuous explanation that his government had anticipated the slowdown and hence allowed the fiscal deficit to rise over the past year or so. You have the finance minister trying to fix prices by telling banks to cut lending rates and companies to cut product prices. You have him making frequent but unwarranted statements about the state of the stock market. You have the steel ministry suddenly trying to protect the very steel industry that was earlier this year condemned as a profiteering cartel. You have special interest groups swarming all over, trying to get tax cuts and sweet deals from the government; the airline industry is a prime example of this.
Is this coherent policy? The standard recipe to beat a slowdown is to cut taxes and step up government spending. But such fiscal policy can work only if a country has a budget surplus or a modest budget deficit to begin with. India is not in that happy position right now. The true fiscal deficit is now at the highest level since the 1991 reforms. Further fiscal deterioration will put?macroeconomic stability at risk. Credit rating agencies have warned us about this.
We have often said in these columns that the UPA government made a cardinal mistake during its term: buoyant tax revenues should have been used to fix the fiscal problem. The money that flowed into the kitty was frittered away, even as the promise to restructure government spending was not followed up on. India is in a fiscal mess at precisely the point when it needs fiscal muscle to support weakening demand. The blame for this has to be laid squarely at the door of the Manmohan Singh government.
The overall tone of ministerial statements is one of innocent helplessness: The domestic slowdown is because of the global economic crisis. That is technically correct. But then the domestic acceleration, too, was partly because of the global boom between 2003 and 2007. The UPA government can’t have it both ways: claiming credit in good times and blaming others during bad times.
The fault lies not in its stars, but in itself.
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