Wednesday, December 03, 2003
The enemy within the Indian economy
(Via Thomas) AndyMukherjee, writing for Bloomberg, warns the Indian government that its profligate ways may well derail the strong economic growth that has the made India the darling of world's business press the past few months. It's good to read a good analysis of the downside of debt after all that rah rah-ing in Fortune, Businessweek etc.
Are such glowing prophecies about India’s economic growth nothing but wishful thinking? They might turn out to be if India fails to deal with the powerful enemy within: A prodigal government that takes a third of the citizen’s incomes as taxes, then crushes consumption by making them pay import tariffs that are among the world’s highest. Since all that revenue isn’t enough to service the existing public debt, the government cuts corners on the most basic services.
Then it goes and borrows still more. According to official figures released Friday, in the first 10 months of 2003, the federal government’s fiscal deficit — what it borrows to meet its spending needs — rose 19 percent from a year ago to 1444 billion rupees ($31.6 billion). An unaffordable profligacy for a government that’s among the most indebted in the world.
Mukherjee goes on to quote my old friend, Prof Vivek Moorthy at IIM, Bangalore.
Vivek Moorthy, a professor at the Indian Institute of Management in Bangalore, uses a marker that shows an even more disturbing picture. He suggests you look at primary deficit, which is fiscal deficit minus interest payments. “Primary deficit is the root cause of all debt,” Moorthy said at a conference hosted by New Delhi-based National Institute of Public Finance and Policy. The reason fiscal deficit is expanding at a slower pace than primary deficit is because of falling interest rates, which allowed the federal government to retire 193 billion rupees of debt in July, and replace it with securities costing at least 4 percentage points less. Still, “the favorable interest rate environment is not likely to offset the widening primary deficit,” Moorthy says in his paper.
I couldn't think of a better reason for the government to start trimming the bureaucracy and sell of some of the loss-making public sector units. But try telling that to a government that's readying to fight an election.
Are such glowing prophecies about India’s economic growth nothing but wishful thinking? They might turn out to be if India fails to deal with the powerful enemy within: A prodigal government that takes a third of the citizen’s incomes as taxes, then crushes consumption by making them pay import tariffs that are among the world’s highest. Since all that revenue isn’t enough to service the existing public debt, the government cuts corners on the most basic services.
Then it goes and borrows still more. According to official figures released Friday, in the first 10 months of 2003, the federal government’s fiscal deficit — what it borrows to meet its spending needs — rose 19 percent from a year ago to 1444 billion rupees ($31.6 billion). An unaffordable profligacy for a government that’s among the most indebted in the world.
Mukherjee goes on to quote my old friend, Prof Vivek Moorthy at IIM, Bangalore.
Vivek Moorthy, a professor at the Indian Institute of Management in Bangalore, uses a marker that shows an even more disturbing picture. He suggests you look at primary deficit, which is fiscal deficit minus interest payments. “Primary deficit is the root cause of all debt,” Moorthy said at a conference hosted by New Delhi-based National Institute of Public Finance and Policy. The reason fiscal deficit is expanding at a slower pace than primary deficit is because of falling interest rates, which allowed the federal government to retire 193 billion rupees of debt in July, and replace it with securities costing at least 4 percentage points less. Still, “the favorable interest rate environment is not likely to offset the widening primary deficit,” Moorthy says in his paper.
I couldn't think of a better reason for the government to start trimming the bureaucracy and sell of some of the loss-making public sector units. But try telling that to a government that's readying to fight an election.
