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”.

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)