A road with uncertainties

A road with uncertainties

The European Union’s bailout of the Irish economy will hardly be the end of the EU’s economic troubles. It is expected that at some point, sooner or later, Spain and Portugal may require medicine. At the moment, there are vehement denials on this count from the Iberian Peninsula, but that is now a norm: The Greeks made similar noises and so did the Irish.

India should take note for it can face problems on two counts. One, the potential for these developments leading to a deterioration of the export environment globally is very real. The danger here is that of Indian exports being hit and the need to resort to economic stimuli. This is against the backdrop of an expected moderation in indirect tax collections from the end of this year due to slower industrial output and other factors.

Two, the stimulus option will not be easy the next time the problem emerges. The last time such stimuli led to a rise in the fiscal deficit from 2.6% of the gross domestic product (GDP) in 2007-08 to 6.5% in 2009-10. Things have eased since then and for fiscal 2010-11 this figure is unlikely to breach the budgeted 5.5% of GDP mark, but it will be just that. The second supplementary demand for grants, tabled in Parliament in this session, when combined with the first one, pushes up the government’s spending plans byRs74,400 crore, close to 1.1% of GDP, roughly 7% higher than the original budget. Much of this expenditure is on account of food and fertilizer subsidies, oil under-recoveries, defence and internal security expenditures. This spending will practically wipe out all the surplus revenue garnered from the 3G spectrum auction. In effect, recurring expenses have been met by the sale of a one-off item. There are plans to fund future expenditures of this kind by selling the government’s stake in public sector undertakings.

Then, there is the problem of oil sector under-recoveries. It is expected that they will come down drastically from the massive highs of 2008-09, but they will still be close to Rs53,600 crore with “politically sensitive" fuels such as kerosene, diesel and LPG constituting the bulk of under-recoveries. Worse, the government is yet to budget the cash subsidies, amounting to Rs29,500 crore of this amount.

There is no doubt that the government can, and will, resort to whatever economic measures are required. The question is at what cost. India’s fiscal situation is hardly propitious for the country to escape unscathed unlike the last time when the crisis hit Indian shores.

Is India ready to fight the next global crisis, whenever it arrives? Tell us at views@livemint.com