Zoo Station

I was thinking of writing something up on the budget and its ramifications, when I came across the Economist's superb analysis of India's economy. It does not specifically discuss the budget, but nonetheless provides an excellent macro view of the economy. The big news, of course, is the savings and investment rates, which have grown to 29% and 31% respectively.

His (Chidambaram's) budget was able to include big spending increases and a return to fiscal prudence. Last year, mindful of promises to spend more on relieving poverty and on health, education and infrastructure, Mr Chidambaram suspended efforts towards fiscal correction, though the outcome was not as bad as he feared. The central government's deficit rose only fractionally, to 4.1% of GDP. When India's state governments are added in, the overall government deficit climbs sharply, to an expected 7.7% of GDP in the present year. But, at the turn of the decade, it was hovering around 10%, so even fiscal hawks congratulated Mr Chidambaram.
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Mr Chidambaram himself lists four main threats to the economy: high oil prices, rising interest rates, external shocks and “the temptation to stray from the path of fiscal prudence”. The government has not passed the full impact of rising oil prices on to consumers. The IMF has estimated the cost of this, mostly borne by state oil companies, as 0.5% of annual GDP in the first half of this fiscal year.

Partly for this reason, inflation, at around 5% a year, remains subdued. Despite this, the Reserve Bank (the central bank) raised interest rates in January. This will help contain the expansion of bank credit, which in the year ending March 2005 was the fastest in Asia, at more than 30%, and of economic growth itself. Indeed, according to figures released this week, the economy is already slowing slightly—to an annualised rate of 7.6% in the last quarter of 2005. This will ease the pressure on India's current account, which after three years of modest surplus is now back in deficit—by as much as 4.6% of GDP in the third quarter of last year.

But the IMF also noted that India's large reserves of foreign exchange ($133 billion) [Ed: The true number is $140 billion] and its capital controls provide a buffer. The bigger danger may turn out to be that India misses opportunities. The present boom should offer the chance for a more rapid fiscal clean-up. Obvious candidates for reform are the inefficient price subsidies—on food and fertiliser as well as petroleum products—that take up 10% of current expenditure.

Not to mention the infrastructure deficit. At some point, India's growth will be hampered by the problems of infrastructure. So, if the government is serious about 10% growth, it's time for them to roll out the red carpet for foreign investment into core infrastructure, since it clearly cannot come up with the resources itself. Just to give you some idea of the capital requirements, India's electricity deficit right now is about 120,000 MW. Assume about $1 million per MW of electricity and you begin to get an idea about the sums of money required. Now add in roads, ports, waste mgmt, airports, railways etc and you see the serious capital constraints at work.