The interim budget announced by Pranab Mukherjee shows that a sea of red ink is lashing the Indian economy. The next government will either have to get this sea to recede or build dykes to protect the land.
Illustration: Jayachandran / Mint
It will not be easy. The next couple of years are likely to be tough ones for the world economy and for India. As International Monetary Fund chief economist Olivier Blanchard told this newspaper, the world is in a deep recession and “we may see a year and a half of negative growth, depending on the country”.
India will fare far better than most other countries, but we will not be completely unaffected. It could be said that India is in the midst of a growth recession—which usually means an economy growing at such a slow pace that more jobs are being shed than added. But we could use it in a broader sense—when growth slips below its recent trajectory.
Governments are expected to spend heavily during such growth recessions even though tax collections are anaemic. They have to run up fiscal deficits. The problem is that the government has prematurely spent its ammunition and will leave the next government with little firepower to attack the problem.
That is both unfortunate and inexcusable. India’s fiscal deficit—if calculated correctly to include off-budget bond issuance—is now at a record high. The ever higher borrowings required to fund this deficit have already roiled the bond market and pushed up yields on government debt.
The current state of Indian public finance is ironical. Manmohan Singh took the first stab at bringing down deficits in the early 1990s, and he met with some early success before a political attack by the Congress old guard torpedoed his plans. Then, P. Chidambaram tried to cut the deficit when he was finance minister in the mid-1990s. A fat pay hike to government employees that he opposed and a severe slowdown after the Asian crisis of 1997 led his plans to crash-land.
Given their trysts with the politics of budget-making, one would have expected the two to use the economic boom to slash the deficit. But in an astonishing case of myopia, both preferred to fritter away the advantage by pouring money in all sorts of social sector schemes peddled by the party high command.
The last five years were one long clash between politics and economics. And there are no prizes for guessing which side won.
Has the UPA government managed finances well? Write to us at firstname.lastname@example.org