Economic Highlights
New
Delhi, 18 June 2012
Dwindling
Economy
PRESIDENT
POLL ADDS TO WOES
By Shivaji
Sarkar
As the nation gets busy electing a new President, the
economic scenario continues to be grave. Industrial production index rises by
0.1 per cent, power generation dips, energy shortage looms large, rating
agencies threaten to downgrade India
to junk level and leaders are in quandary.
The World Bank (WB) has also not come up with any
relief. In its latest report, Economic Prospects, Uncertainties and
Vulnerabilities, the Bank says that India is vulnerable to more damages than in
2008, the time of the Lehman Brothers crisis that rocked the US and European
economies. It further points to the Government’s severe policy tightening as
the reason and warns to prepare for the worst, a global finance market freeze. If
that happens, then financing the growing deficits is going to be more difficult.
But, India
is not the only one sinking. BRICS – Brazil,
Russia, China and South Africa – is too facing a fall
in industrial production. Even Turkey,
which has so far been less hit by the European turmoil, as it was refused entry
to the Euro zone, faces weak growth. Thus, an estimate is that India and 30-odd
countries require high external funding – either as investment or debt.
Importantly, the WB estimates that India needs
financing exceeding 10 per cent of its GDP, which is too tall an order. Its prescription
needs to be studied with caution. If it is accepted India
would join countries like Greece
in falling into a debt trap. Already it has a high debt ratio, almost at 45 per
cent of the GDP, according to Government estimates and 78 per cent of the GDP,
according to international assessments. Any further increase in debt might lead
to a critical economic situation, which may not be easy to contain.
Worse, the Presidential election could leave a bigger
hole in the coffers of the Central government. Much of the political cacophony
by Trinamool leader and West Bengal Chief Minister Mamata Banerjee and bonhomie
by Samajwadi Party leader Mulayam Singh Yadav is directed at drawing the
maximum mileage, with finances being a major part, as the two States are facing
severe financial crisis. Whether Banerjee remains within the UPA or not she is
bound to pose problems. She has been seeking a debt waiver of Rs 30,000 crore
for Bengal so as to begin the State economy
afresh on a clean slate. However, the Centre is willing to waive interests of
Rs 10,000 crore in three years – a little over Rs 3,000 crore per year.
Likewise, much can be read into Senior Yadav’s
justification for supporting the UPA presidential candidate. He told
journalists that following the bad situation of the misrule of the previous
(BSP Chief Minister Mayawati) government, “we want maximum Central assistance”.
His son, Chief Minister Akhilesh Yadav, had met the Prime Minister and urged
that his State needed Rs 97,000 crore assistance to fulfil its election promise
of doling out unemployment allowance and tide over the crisis left by Mayawati.
Well, the UPA realises that if it accepts Mamata’s demand,
then it would open up similar avenues for Punjab,
which requires Rs. 71,510 and
Kerala which has a debt of Rs 78,329 crore. Indeed, the Presidential election may
emerge as the battleground for a quid pro quo. If private funding of MLAs to
lure them to vote in Jharkhand elections is considered unethical, shouldn’t funding
of States by the Centre at this time be considered similar? The Centre has only
an answer. It merely cites the Finance Commission (FC) report filed two years
ago, which stated that Bengal, Kerala and Punjab had a weak financial condition
and their demand for aid should not be given a political colour. The Congress thus
states: “It is an administrative process that is on”.
Apparently, the Congress would want to wean the Shiromani
Akali Dal and Bihar’s JD-U support for this
poll and is working though back channels. But in the give and take, it may end
up coughing up unrealistic and unaffordable Central assistance. At this point,
the formation of new configurations in the political scene may have a lot to do
with economics, inflation, falling rupee and growth parameters, rather than the
concern for a deserving candidate at Rashtrapati Bhavan.
Whether the problem is solved or not the nation’s shrinking
kitty may have to bear further brunt. The critical question is how it would
improve the investment rating. The S&P and McKenzie have threatened to
lower it. Political compulsions of UPA might lead to succumb it. The critical
question is where will the Central government find the finances to fund its allies
or supporters? The Centre’s revenue
deficit is growing as it is increasing the size of the unnecessary bureaucracy
and unwarranted expenditure.
In short, it does not have the finances to sail through
the extravaganza of the presidential elections. It will be under compulsion to
draw funds. It has to access the market or public sector banks. It means it has
to take huge debts. It would also mean it would give up the concern for fiscal
prudence. The International Monetary Fund (IMF) has warned that any further
fiscal profligacy – beyond 5.9 per cent of fiscal deficit – might lead to great
danger.
It includes with it some other problems as well. The Government
has not been able to contain inflation during the past three years. More fiscal
profligacy might lead inflation to shoot up. Consumer price inflation remains
at over 10 per cent – over 29 per cent during the last three years. It is
putting severe strain on the economy, purchasing power, poverty reduction,
investment in capital goods and contraction of the economy at every level. The
next to be hit are the government’ flagship programmes like MNREGA and other
social sector and rural reconstruction programmes.
Notwithstanding the Presidential race, the political
leadership needs to have a relook at the economy. Industry, barons are unhappy,
economists are concerned, international rating agencies are in a tizzy and
there is little effort at reaching a solution. Time and decisions are
important. The political leadership should realise this and not depend on the RBI
to look for a rescue. ---INFA
(Copyright,
India News and Feature Alliance)
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