Dalal Street Investment Journal

Need Government Austerity To Reduce Deficits

The kind of action that the Ramlila Ground in Delhi has been witnessing over the past one year or so has been nothing short of amazing. Whether for a crusade against corruption or rallies demanding the passage of an effective Lokpal Bill, a whole bunch of activists have descended on this part of the National Capital over the past one year or so. It therefore comes as little surprise that the party which has been at the centre of all this action, i.e. the Congress, held a rally on November 4, 2012 to highlight its achievements on the reforms front.

Populism has been at the core of India’s political system, and this rally conducted by the Congress last week was on the same lines. The country has lagged with regard to economic reforms over the past three years despite the fact that there was a dire need to expedite them to get back on the growth path. India’s growth story was virtually being written off at a remarkable pace, not only by the Indian media but also by international rating agencies that kept threatening of downgrading India to junk status. But the revival of the ‘animal spirit’, as the Prime Minister Dr Manmohan Singh termed it, saved our country just in the nick of time from a major embarrassment. In the last three months, the present government has suddenly upped the ante on the reforms front.

The November 4 rally was to put forth the government’s point of view and showcase its success on the reforms front. The lion’s share of the credit for this success, in whatever measure it has come, goes to P Chidambaram, who after his reappointment as the Finance Minister was instrumental in changing the economic environment from negative to positive.

But the so-called reforms kicked off by raising diesel prices and capping the supply of subsidised LPG cylinders, as also of allowing FDI in retail and other small measures cannot solve the deep-rooted malaise of mismanagement of revenues. This mismanagement will eventually be responsible for the fiscal deficit crossing the 5.1 per cent mark as pegged by the Union Budget of 2012-13.

To cover this widening deficit, the government has to borrow Rs 5.69 lakh crore from the market. If the deficit widens further to six per cent, it would be required to raise an additional Rs 80000-90000 crore. Despite having all the resources in good measure at our disposal in the past, we have wasted them and are now lining up a debt trap for ourselves.

The government needs to understand that simply announcing economic reforms and introducing populist schemes to win elections is one thing, but the main and a rather serious concern is that there are a number of shortcomings of governance, which if resolved, can automatically help in improving economic growth.

After 21 years of economic reforms, where do we stand? As per a recent report by the IFC and the World Bank, India ranks 132nd out of 183 countries in terms of ease of doing business. The Index of Economic Freedom 2012 published by the Heritage Institute ranks India in the 123rd place. There are many other pieces of data that suggest that India has gone from being bad to worse over the past 21 years ever since we began reforming our economy.

Rather than wasting time on passing populist legislations, the government should prioritise disentangling the knots on administrative and policy issues. It is better to work on addressing administrative hurdles because of which the country is not getting substantial investments. The bureaucracy is indisciplined and is wasting a lot of time in taking proper decisions.

If the government wishes to showcase its real worth, the Prime Minister has to see that his orders are followed by his Cabinet in a disciplined manner and are seriously implemented. The most important reforms that we need are on the governance front. We need to transform the delivery of all government services, among which revenue, police and judicial services are the most important. Studies across the globe show that good governance is critical to rapid economic growth.

As for controlling the fiscal deficit, the government needs to put some austerity measures in place for itself. There is an urgent need to cut down on governmental spending, and this can begin with the Finance Minister bringing down by at least 10 per cent of the allocations made to the various ministries. It will also send a clear signal to one and all about how serious the government is on bridging the fiscal deficit.

While all this has been happening, the markets have taken a good turn upwards. While we continue to be bullish on the market going forward, there is an imminent fear among participants on what would happen if the flood of FII money, which is currently driving the market, changes course and finds its way out of India. Our cover story addresses this very serious concern so that investors can stay calm and enjoy a prosperous festive season. Like always, I look forward to your feedback on the contents of DSIJ. Till then, here’s wishing you a happy investing year ahead!