Author: Swapan Dasgupta
Publication: Free Press Journal
Date: March 25, 2008
It is often claimed that high growth doesn't
win an election in India but high inflation helps lose it. The euphoria over
loan write-offs and higher exemption limits for income taxpayers is certain
to be either drowned in a backlash of unfulfilled expectations or simply forgotten
by the time the Finance Bill is passed.
Last Monday was a terrible day for the global
capital markets. The Dow Jones index slipped below the 12,000 mark, the Footsie
100 plunged by almost two per cent to a two-year low, and the Sensex took
a 951 point pounding and fell below the 15,000 mark. The immediate provocation
for the slump was the distress sale of US investment bank Bear Stearns over
the weekend-it was sold for less than one per cent of what it was worth just
a year ago-but the larger fear was of a global recession, with the US as the
epicentre.
The implications of what happened at Bear
Stearns and, two months ago, in the British mortgage company Northern Rock
(which prompted the first nationalisation in Britain in more than three decades)
are still being dissected. As an offering to that exercise, Bill Emmott, a
former editor of The Economist, suggested that "The biggest and most
important casualty...is going to be the culture of easy lending to companies
and to households that has lain behind America's economic growth in the past
six or seven years. As a result, even if the Fed cuts US short-term interest
rates again..., credit conditions in America will still tighten." This
is already happening in Britain where, despite interest rate cuts, banks are
scrapping two and three-year fixed rate mortgages and re-negotiating their
loans to home-owners at a much higher rate because of the inherent risks involved.
"On the Richter scale of financial crises"
wrote a financial commentator, "the present implosion now registers as
a full force nine 10 being of the never-before-recorded variety." A feature
of this global downturn is the pro-active role of all Governments. The hitherto
cautious Federal Reserve has cut interest rates dramatically over the past
quarter and the Bank of England injected a whopping #5 billion into the strained
money markets. In a dramatic move last Sunday, the Fed invoked Article 13
(3) of the Federal Reserve Act, last used during the depression of the 1930s,
which allows it to shower money on almost anybody it wishes by a vote of five
governors in "unusual and exigent circumstances". The contrast between
the sense of urgency being displayed by authorities in the world's financial
centers and the cynicism of those at the helm in India, is striking. For the
past three months at least, there have been early warnings of the GDP growth
slipping below the targeted nine per cent.
There have also been fears (subsequently confirmed)
of the inflation rate rising above the Reserve Bank of India's five per cent
danger mark-a reason why the much-awaited cut in interest rates was shelved.
In addition, there were strong indications that recessionary conditions in
the US, the appreciation of the Rupee and high domestic interest rates could
see a slowdown in the annual growth of Indian exports from an estimated 8.7
per cent in 2008 to 7.8 per cent in 2009. In short, the writing on the wall
pointed to the compelling need to tighten belts, eschew profligacy and focus
single-mindedly on maintaining India's competitive strengths in a difficult
environment.
In recent times, only Gujarat Chief Minister
Narendra Modi has had the gumption to defy political wisdom and refuse a blanket
amnesty to many thousands of farmers who were charged with power theft. Most
incumbent governments have followed the line of least resistance and made
extravagant populist gestures that have cost the exchequer dearly and yet
not guaranteed re-election. The UPA Government fell effortlessly into a self-made
populist trap in this year's Budget. With single-minded dedication to bolstering
Sonia Gandhi's image as India's Lady Bountiful, the Finance Minister earned
a bagful of political brownie points with his awesome debt-waiver programme
that is expected to cost anywhere close to Rs 75,000 crore, spread out over
three years. It was bad enough that this gesture of utter irresponsibility
was announced at a time when the global economy is so delicately perched.
What is even more astonishing is that there has been a subsequent clamour,
led by heir-apparent Rahul Gandhi and Agriculture Minister Sharad Pawar.
The national burden of the UPA's vote purchase
scheme is quite steep. If the faltering National Rural Employment Guarantee
Programme is added to the loan-waiver scheme, India will have to expend nearly
two per cent of its GDP to prevent the Congress and its allies from going
under politically. The all-important distinction between private money and
public funds appears to have been obliterated by this Budget. This is more
so when, by the Finance Minister's own admission, "leakages" in
the public distribution system are in the region of 36.38 per cent, i.e. more
than a third of public money never reaches the targeted beneficiary. It is
often claimed that high growth doesn't win an election in India but high inflation
helps lose it. The euphoria over loan write-offs and higher exemption limits
for income taxpayers is certain to be either drowned in a backlash of unfulfilled
expectations (there are reports from Orissa that some villagers have been
told that loans taken for marriage expenses have also been waived by a benevolent
Sonia) or simply forgotten by the time the Finance Bill is passed. However,
what will endure is the soaring rate of inflation caused by foodstuff shortages
and higher prices of items such as naptha.
The pressure on prices is likely to be maintained
by the dramatic rise in money supply (M3) which grew by roughly 22 per cent
between 2007 and 2008. At the time the NDA demitted office in May 2004, the
broad money supply growth was around 12 per cent. Add to this the "fudgy
math" of the Government. Official estimates say that the central fiscal
deficit will decline from 3.1 to 2.5 per cent of the GDP. But, as many economists
have pointed out, this figure doesn't include off-Budget subsidies on food,
fertiliser and petroleum products, the deficit of states, and the fiscal costs
of the debt-waiver.
According to a Goldman Sachs study, the consolidated
fiscal deficit will grow from 6.6 per cent of GDP in 2008 to 6.9 per cent
in 2009. Finance Minister Chidambaram may consider himself a trifle unlucky
that the global downturn happened just as the election season began in India.
A government desirous of maintaining elementary standards of rectitude would
have attempted to balance its political imperatives with a sense of national
responsibility.
More important, it would have tried to repair
India's leaky roof during the glorious sunshine of the past four years by
facilitating dramatic improvements in infrastructure. Neither was attempted,
not least because of the Left's ideological cussedness. For the past four
years, India's success story has been entrepreneur-driven. The Government
hasn't been able to help much but it has, at least, not come in the way. Now,
when a modicum of state intervention is imperative, the Congress has decided
it is time to party at the taxpayers' expense. No wonder they call it Incredible
India.
