Originally Published 2011-11-01 00:00:00 Published on Nov 01, 2011
All over Europe, the new mantra is austerity. Though India's exports have been doing well since last month, this may not be sustained in the future if our big trade partners are busy tightening their belts and trade credits dry up.
Need for austerity measures
India's economic growth seems to be slowing down from its previous high level because of global and domestic problems. Rated as one of the fastest growing economies, India may now achieve around 7 or 8 per cent growth and not 9 per cent. On the domestic front, though there are no serious signs of recession, problems of managing state finances are slowly cropping up.

Even for ordinary people, managing personal finances is becoming difficult since inflation seems to be up and down the same high range of 9 per cent. It is making people feel reluctant to spend on extras like consumer durables, cars, travel and entertainment as the monthly food and fuel bill is getting higher. This is affecting the demand for goods and services and will hit business sentiments.

The stock market is also going up and down frequently because huge sums (Rs 2000 crore) had been withdrawn by the FIIs in September due to global uncertainties. India is still attractive as an investment destination but slowdown in industrial growth and a falling corporate profit profile are taking away some of the shine. There are many other markets which are doing better and FIIs are moving their money to such markets and people are even investing in gold and silver once again.

Apart from high food inflation, the fiscal deficit seems to be getting out of control and in the first five months of the current fiscal year, 66 per cent of government expenditure has already been recorded which means that the government will have to go in for big market borrowing of Rs 280 billion during the rest of the financial year to meet its dues. Apparently, the huge public spend has been on account of oil and other subsidies. This is because while oil prices have been going up, domestic prices have been maintained at nearly the same level through subsidies. Clearly, the government is going to cut some subsidies, and it is likely that fuel subsidies will be axed further. There is already a talk of linking domestic fuel prices with international prices. Inflation will be stoked when diesel and cooking gas prices are raised next.

Government borrowings too could be inflationary because the government will borrow from the public and the market by issuing bonds which will enable it to spend money on its various programmes. This will release money into the financial system which will end up stoking inflation. The credit rating agencies like Moody's and Standard & Poor's will be watching how the government manages its finances in the next few months. Moody's has already downgraded the State Bank of India from C grade to D+ because of its growing non-performing assets. The government has already promised infusion of Rs 8000 crore for its recapitalisation. Similarly, another hole in the exchequer's pocket will be the bailout of Air India, ailing for a long time. There may be more such expenditure in the future, making it all the more difficult to control overshooting the targeted fiscal deficit.

Moody's downgrade of the State Bank of India is probably going to shake the confidence of the people in India's premier bank. The problem seems to be mounting NPAs and among various reasons given, the behaviour of its top brass and political patronage seemed to be behind it. In the case of Air India, its current malaise has been not being able to cut losses. So many seats are blocked for VIP travel in every flight abroad for which no revenue is earned. But not all public sector enterprises are loss-making and we have some of the best examples in the oil sector.

All over Europe the new mantra is austerity. Though India's exports have been doing well since last month with a surprisingly high growth rate of 40 per cent, this may not be sustained in the future if our big trade partners are busy tightening their belts and trade credits dry up. There is also the rather disappointing news of manufacturing and service sectors contracting in India which cannot isolate itself from the global happenings. The revenue collection too has not been high enough to cover the extra expenditure of the government. Clearly, India will have to go in for austerity measures or a "hair-cut".

Recently the Greek government has announced a number of austerity measures, including scaling back the public sector to cutting down pensions as part of the condition for releasing the next installment of $11 billion in aid from its "troika" of foreign lenders - the European Central Bank, the European Commission and the IMF. Earlier it went for an increase in taxes and wage freezes. These measures have increased the misery of the already unemployed and have been met with huge resistance, strikes and violence in the streets.

India still has an option because its situation is not as bad. Instead of cutting subsidies and raising prices of petrol, diesel and gas, other austerity measures can be implemented. The Prime Minister is already vetting VVIP trips abroad. Every time a minister and his entourage travels, millions of rupees are spent. There are many other ways in which austerity measures can be undertaken by the government instead of burdening the common man or woman by raising fuel and food prices. Many of the public sector enterprises need trimming and are made more manageable. Much flab can be cut from government activities that have failed to benefit the poor.

If austerity measures take the form of cutting expenditure on essentials like infrastructure development, the worst sufferers will be the poor. The upgrade of rural and urban infrastructure could be postponed and the much needed affordable housing, supply of clean potable water, sanitation and sewage disposal programmes could receive less government help. Public money has to be spent on cushioning the adverse impact of slow economic growth and high inflation on low-income groups because unlike the EU, India does not have any social safety net for the extremely poor.

There is a lot of money which the government can tap for making provisions for the poor and the needy despite austerity measures. Unfortunately, only 3 per cent or 31.5 million of the population pays income taxe as compared to 45 per cent in the US. Getting more people in the tax net and eradication of corruption could mobilise huge sums of money into government coffers. Cutting subsidies, however, would be the most acceptable way to get back on track regarding fiscal deficit management by the government, and it will be a measure approved by the credit rating agencies. So, expect more pain from austerity measures.

(Dr. Jayshree Sengupta is a Senior Fellow at Observer Research Foundation.)

Courtesy: The Tribune
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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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