The best one can say about India’s Bharatiya Janata Party (BJP)-led National Democratic Alliance government (NDA) is that it hasn’t fallen prey to the economics of politics the way many governments before it have. The results are apparent. Many Indian businessmen are unhappy. There have been no major (or even minor) corruption scandals. And real estate prices in Delhi and its environs are down.
The worst one can say about the government is that it is pretty much the same as its predecessors when it comes to the politics of economics. The rising chorus in New Delhi and Mumbai, India’s political and commercial capitals, respectively, for a so-called fiscal stimulus proves that.
India is no stranger to fiscal stimuli. The last big one was in 2008-09, a response to the global financial crisis and the economic slowdown it caused.
The result: India’s economy registered a V-shaped recovery.
The fallout: The wheels came off very soon.
For decades now, India’s problem has simply been that capacity constraints (famously called supply-side issues by economists and politicians alike) cause any period of consistently high growth to result in inflation. In short, the economy overheats. The current government may have begun to try and address some of the constraints, but the job is by no means done (Indeed, it is not even well-begun).
Government spending can be (and usually is) a part of such fiscal stimuli, but the current financial situation, despite benign oil prices, doesn’t provide too much space for that—not without breaching fiscal discipline. The government may still want to do that. Public investment, everyone agrees, has to lead private investment, which looks a non-starter for at least a few years with most large companies struggling to reduce the debt on their books (and banks struggling with the consequent bad or almost-bad loans).
In a year when four states (West Bengal, Assam, Tamil Nadu and Kerala) and the federal territory of Puducherry go to the polls, and in the context of the ongoing agrarian crisis—one more bad monsoon could be a disaster, and reports are already beginning to come in of the unnaturally warm winter of 2015-16 playing havoc with the winter crop—the NDA may well want to be a little populist.
Neither the finance minister nor the governor of the Reserve Bank of India (RBI) are in an enviable position. Both have tough and unpopular calls to make.
RBI governor Raghuram Rajan made one such earlier this week by holding interest rates and indicating that the bank’s future course of action will depend on what the government chooses to do in the Union budget. Finance minister Arun Jaitley will make his on 29 February when he presents the budget.