Intellectual Thoughts by Sanjay Panda !!!!!: Economy- Moving from the crossroads


Thursday, December 24, 2009

Economy- Moving from the crossroads

The Union finance ministry’s mid-year fiscal Review, tabled in Parliament last week, notes very correctly that the “current period represents a crossroads for the Indian economy”. Having weathered the global economic downturn, the Indian economy has performed better than expected. The review offers an honest account of the challenges ahead, hence the view that India is at a crossroads.
Much of the near 7.0 per cent growth this year has come from the government’s fiscal stimulus packages. As the government gradually winds down the stimulus, which it must in the interests of fiscal prudence, private consumption and investment will have to step in to sustain the growth process. For this, the economy needs policy reform and sustained investment, especially in infrastructure, that can drive the growth process forward.
The Review also offers an honest assessment of the inflation challenge, noting that in the current phase, food price inflation is being driven both by supply constraints and the rising demand for food among the poorer classes — a consequence of the government’s pro-poor policies. By rejecting the view that inflation is being caused by rising aggregate demand, the Review seems to want to discourage a monetarist response to price rise.

A second concern that preoccupies the Review is the likely embarrassment of riches from a potential surge in capital inflows. The Review admits that such a surge could stoke inflationary pressures, firm up the rupee and reduce the competitiveness of Indian exports, entailing fiscal costs. Noting correctly that this could be a long-term challenge, but ruling out any early possibility of imposing a tax on capital inflows, the Review expresses the hope that such inflows could be channelised into productive investment in infrastructure. The government has also hinted that it can afford a deterioration in the current account deficit up to 2.5 per cent of GDP. Appreciating the policy dilemmas facing the Reserve Bank of India, the Review correctly takes the view that “the challenge is to support the recovery process without compromising on price stability and through a careful management of trade-offs”.
The most important trade-off is between growth and inflation, and between fiscal stimulus and fiscal rectitude. While underscoring the government’s commitment to fiscal rectitude, the Review is candid enough to state that the “timing of the exit and the pace at which it should be carried out will depend on the strength of the recovery and its sustainability without fiscal stimulus”. The Review is right to underscore the importance of reducing wasteful expenditure, especially on non-merit subsidies. This is an issue on which the government has remained at a crossroads for far too long, not taking the right path to fiscal rectitude. In the name of stimulus and growth, a range of subsidies are still dished out to a variety of vested interests. Till that bill is curtailed, not much can be done to move away from the crossroads on to the right path to sustainable growth.

BS

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