Home >Opinion >Online Views >Vijay Kelkar’s perfect storm

If Vijay Kelkar, the chairman of the Committee on Roadmap for Fiscal Consolidation, is to be believed, the Indian economy is about to hit a perfect storm. In many respects, there is far bigger trouble ahead compared with what was a mere balance of payments (BoP) problem in 1991.

There are three factors that Kelkar lists that should worry any policymaker (Mamata Banerjee included). One, the high price of energy sources and India’s heavy dependence on their imports. Two, unlike 1991, when India was a closed economy, today the country is no longer shielded from developments in different parts of the world. The happenings in Europe should certainly worry our leaders. Finally, high growth is no longer something that we should strive for: it is a necessity for maintaining internal order.

Kelkar states that if the elasticity of employment to gross domestic product (GDP) growth—the percentage change in employment due to increase in growth—is 0.4%, India needs to grow at a minimum of 7% to absorb the increase in its labour force. At 7% growth in GDP, employment will increase by 2.8%, just sufficient to absorb the labour force growing at 2.5%. Lower growth is likely to lead to lower employment, which in turn, will fuel social unrest. These can no longer be dismissed as problems that will emerge in the future. In the decade 2011-2020, India along with China, will inject a historically unprecedented number of workers into the global workforce. Increasingly, this demographic “dividend" is turning into a nightmare unless, of course, the Indian economy grows in excess of 7% for many years ahead.

Kelkar’s report should be read against this background. When economists talk of fiscal consolidation, they don’t talk in some statistical fairyland. Unless the government curbs its expenditure—especially on subsidies—the Reserve Bank of India will be in no position to reduce interest rates and the private sector will not be able to restart investment. Kelkar estimates that if the Union government does not take corrective steps (the no reform scenario in his report), the government’s total expenditure will be 15.2% of GDP (against the budget figure of 14.7% of GDP, half a percentage point less) and its total receipts just 9.1% (against the rather rosy figure of 9.6% of GDP). In other words, the fiscal deficit will be 6.1% of GDP. This is economically unsustainable.

Against this backdrop, the government’s recent administrative steps are rather homeopathic in contrast with what is needed. And if over this, it decides to go in for measures—such as implementing the food security law—Kelkar’s perfect storm will no longer be an imaginary event.

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