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From morality to flexibility

Feb 25, 2009

Government pushing on the fiscal accelerator
Perhaps the UPA government has become extremely confident of its victory in the upcoming general elections. Because then it will be able to privatise a few government assets and in one fell swoop, bring the ever so ballooning fiscal deficit under control. There is hardly any other rationale to indulge in another round of fiscal stimulus as it did yesterday, even as global rating agency S&P lowered its outlook on India. Fiscal deficit as a percentage of GDP, a measure of how much more the government spends than it earns, is already expected to touch 6% and with the latest tax cuts thrown in, it may rise further to 6.5%. And this is without considering the off-balance sheet liabilities like oil and fertilizer bonds. Contrast this with the target of 2.5% and the magnitude of the fiscal profligacy becomes evident. Little wonder, S&P has lowered Indian sovereign ratings to the lowest grade in the investment grade category. In fact, it has even threatened to push the ratings into the 'junk' category if the fiscal situation continues to worsen. The government on its part has claimed that it anticipates economic scenario to worsen further and hence, had to indulge in another round of fiscal stimulus. It took advantage of the 'flexibility' that the constitution provides to incumbent governments to take policy actions even in an election year. Contrast this to the blahs-blahs of 'propriety' (or morality) from the Finance Minister during his interim budget announcement as he did not announce any such economic booster.

China's attempt at boosting its auto industry
While India cannot escape a rap on the knuckles with fiscal stimuli of the order of a few percentage of GDP, China has unleashed spending of more than 25% of its GDP and not even few eyebrows are being raised. This is because unlike India, China runs a huge fiscal as well as current account surplus, giving it enough room to loosen its purse strings. And it is doing just that. As per Bloomberg, the dragon nation has drawn up a plan to strengthen its domestic auto industry and turn few of its home grown brands into world beaters.

Although car demand in the world's most populous nation has fallen for five of the past six months, abolition of some road taxes and other measure have helped contain the fall, and even enabling it to surpass US as the world's biggest auto market last month. However, the country's auto companies continue to remain 'cheap assemblers' for world's biggest auto companies like GM and Toyota, a scenario it is hoping to change. It attempts to do so by bringing in consolidation in its auto industry and build 2-3 automakers with annual sales of more than 2 m vehicles by 2011. It wants another four or five with sales above 1 m by the same point.

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