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Politics takes precedence - Views on News from Equitymaster
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  • Jul 17, 2003

    Politics takes precedence

    While the elections are still a while away, the process of wooing the electorate has already begun. The most apparent indication of this has been from the union government, which in the last few months has initiated a slew of measures to win the hearts of the population.

    While the intention behind most of these schemes has been good, the means are debatable, as to the effects of the same on the fiscal health of the economy in the long-term. It all started with the reduction in the Public Provident Fund (PPF) Rate. While the rate has been reduced to 9.0% from the earlier 9.5%, the government has announced a special dividend of 0.5% for the current year. In effect, the rate has been maintained at 9.5% for another year in order to pacify the large middle class population of the country.

    Further in its efforts to provide a social security cover for the retired populace, the government launched the Varishtha Pension Scheme through LIC. While the good intention seems to be in place, the question is whether the government can afford this in the long-term. The scheme guarantees a return of 9% (when the prevailing fixed deposit rates are between 5.5%-6.0%). The difference in earnings and payout by LIC will be borne by the government.

    In a scenario where interest rates are likely to remain soft, this scheme defies all logic and rationale. It is not as if we do not have enough problems on the fiscal front (fiscal deficit of 5.6%), this scheme is likely to put additional burden on the exchequer. That apart, the benefits of most of the government schemes have not exactly reached the deserving. The best example is the public ration scheme that was designed to provide basic food articles at a discounted rate. The benefits of this scheme have also accrued to the class of society that really does not need the same. Keeping this in mind, it is debatable whether the real benefits are passed to the section of the population that really needs social security.

    The government has not left out the rural population also from its bid to win over votes. It has reduced the interest rate on farm credit. This is likely to help reduce the burden on farmers. But the timing of the announcement raises eyebrows. The argument being put forth is that the benefit of lower interest rates have not been passed on the rural poor. The timing of this move seems really to placate the electorate.

    The signs seem so clear that even the dillydallying over the disinvestment process seems to be motivated by political needs. Whichever way one looks at it, the government seems to be going all out to woo the electorate. However, one needs to seriously look at the implication this is likely to have on the economy in the long term. In the 21st century doesn’t India need a long-term vision without the shadow of politics?



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