Dr Bharat Jhunjhunwala
My car mechanic said that his business wills pickup only after another two years when the Modi Government is gone! A cement dealer from Aurangabad, Maharashtra said that his sales are down by 30 percent. A property dealer from Delhi said that property prices are down by about 50 percent. Finance Minister Arun Jaitley seems oblivious to such negative undercurrents. He continues to harp that India is the fastest growing economy among the large countries. He has dismissed the doubts regarding India’s present 7-percent plus rate of growth saying that the World Bank has endorsed these figures. He should know that as a policy the World Bank accepts the figures given by a member country. The World Bank does not make an independent assessment of the growth rate. In any event, what the World Bank says makes no difference to the car mechanic.
The Finance Minister has blamed the global economy for the rate of growth of the Indian economy not being yet better. It is indeed true that the global economy is down. The international Monetary Fund has recently lowered its growth forecast of the growth rate of the world economy for the coming year. But the real culprit is that the Finance Minister has failed to implement policies to counter the global slowdown that was well known to deepen. This can be explained by an example. Let us say the Meteorological Department has predicted that there will be less rains in the coming monsoons. A farmer planted paddy ignoring this warning. The rains failed and the farmer lost his crop. He then blamed the heavens for the loss of his crop. That is technically correct. But the real culprit was he himself. He had not read the writing on the wall and planted paddy instead of bajra or corn which could grow in less rains. The Finance Minister is similarly blaming the global economy. The IMF has lowered the growth forecast. It is well known that there will be less demand for goods in the developed countries. The Multinational Corporations will not establish new factories in India to supply goods to their home countries as they had done in China in the nineties. Ignoring this warning, the Finance Minister has continued to place his hopes on greater inflow of foreign investment. He has continued to reduce Government expenditures to control the fiscal deficit and reassure foreign investors. But Multinational Corporations have not come and the growth rate has remained placid. Now the Finance Minister is blaming the global economy for the slowdown in India. That is technically correct. But the real culprit was he himself. He should have read the writing on the wall and pushed domestic investment. He has foolishly continued to follow the IMF-World Bank prescription of low fiscal deficit.
Low fiscal deficit can possibly be good when the world economy is buoyant. The reduction in domestic investment due to reduction of government expenditures can then be made up by the increased inflow of foreign investments. The same control of fiscal deficit becomes a disaster when the global economy is down. Domestic demand is reduced because of cuts in Government expenditures; and foreign investment does not pick up because of global slowdown. The Finance Minister should have seen the writing on the wall and increased Government expenditures to nullify the impact of the global slowdown. Unfortunately he has followed the prescription of the World Bank and has led the economy into a coma. Now he is blaming the global slowdown just as the foolish farmer blamed the rains for the destruction of his crop of paddy.
Faced with this grim reality, the Finance Minister has now come up with another so-called “solution.” He says that no target for the fiscal deficit should be set up by law as has been done in the Financial Responsibility and Budget Management Act (FRBM Act) made by the earlier NDA-I Government. This is taking honesty to its extreme. The objective of the FRBM Act was to put limits on Government’s expenditures under the assumption that these are fundamentally unproductive and a waste. Reduction in unproductive expenditures will surely lead to control of inflation. Foreign investors will develop confidence and invest in the country. This logic has its merits. But this logic is not applicable in the present circumstances when the global economy is down, when there is absence of demand in the developed countries, and when the Multinational Corporations are unwilling to invest overseas.
The Finance Minister forgets that the NDA-I, UPA-I and UPA-II did not adhere to the targets specified in the FRBM Act. He should clearly state that the FRBM Act has outlived its purpose. It is necessary for the Government to increase expenditures and jumpstart the economy. Replacing a fixed figure for fiscal deficit by a range, as proposed by the Finance Minister does not overcome this basic issue. Need is to amend the FRBM Act and exempt capital expenditures from its ambit. For the present he must ignore the FRBM Act like his predecessors. He is like the house owner who debates whether the bucket is of the correct size when his house is on fire. This is not the time to focus on these niceties. The Government should simply dump the FRBM Act that was made in a situation of global growth and move on with reviving the economy by increasing Government expenditures.
The impact of fiscal deficit on the economy depends upon the character of the Government. The increase in expenditures have a negative impact if they are siphoned off by the politicians, bureaucrats and crony capitalists as was happening during the UPA Government. The same increase in expenditures has a hugely positive impact if the money is used for true investments in highways and net connectivity. The NDA-II Government is honest. Increased government expenditures will have a hugely positive impact. The situation is similar to a businessman taking a loan. Impact of the loan on the company depends upon how the loan money is used. The Company will grow if the money is used to build a new factory. The Company will collapse if the same money is used to build a five-star office. It is unfortunate that the policies being implemented by the Finance Minister at the behest of the World Bank are undoing the honesty of the NDA-II Government and frittering away the massive mandate given by the people of the country.
(The author was formerly Professor of Economics at IIM Bengaluru)
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