India’s trade deficit could hurt growth

India’s trade deficit could hurt growth
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First Published: Sun, Mar 02 2008. 11 35 PM IST
Updated: Sun, Mar 02 2008. 11 35 PM IST
The Budget proposes an 18% increase in public spending to Rs6.58 trillion. That’s after a 24% hike this year, in which spending ran 10% over the original budget. Food, oil and fertilizer subsidies inflate spending as prices rise. Past expansions have been derailed by financial crises caused by an over-expansionary public sector. This may be recurring.
The Budget announced a 20% increase in education spending and a 15% increase in health spending. The government expects economic growth of 8.7% for the year to 31 March — down from 9.6% the previous year. Wholesale price inflation was 4.4% in the year to February, but that figure is dampened by oil and food subsidies. Imports in the nine months to December were $169 billion (Rs6.74 trillion) and exports $111 billion. The trade deficit of $57 billion was up from $42 billion a year ago.
The Congress party-led coalition faces elections by early 2009, so this is an election budget. The opposition Bharatiya Janata Party (BJP) has won several regional elections, but its leadership is untried following the retirement of Atal Bihari Vajpayee, whose 1998-2004 government carried out the reforms that brought on the current boom. So, it’s no surprise that oil, food and fertilizer subsidies have been maintained, or that the Budget includes a $13 billion loan scheme for small farmers. However, subsidies have been far more expensive in the current fiscal year than the government expected, as commodity prices have risen by 50% or more. That’s why inflation appears contained; with food and oil subsidized, Indian inflation statistics are Fed chairperson Ben Bernanke’s dream — only “core” prices rise. Both last year’s and the projected spending increase for this year are far above the gross domestic product growth.
The Congress appears economically to be like the French Bourbons; it has “learnt nothing and forgotten nothing” from India’s opening to the world market. Unless the BJP, under pro-market leadership, wins next year, India’s recent trend towards greater government spending and higher economy-distorting subsidies will continue. Since India runs a large trade deficit, that must sometime lead to a collapse of confidence among international lenders. India’s current 8-9% economic growth rates would then be only a memory.
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First Published: Sun, Mar 02 2008. 11 35 PM IST