India's growth story in the past decade has been spectacular but not inclusive. Subsidies on essential items, loan waivers and welfare schemes have therefore been the toast of the electorate. But how long can the government put the country's long term interests at stake for some brownie points?
Yes, we are talking about a bill in consideration which will help provide food grains at cheaper rates to the poor. We do not think anyone would oppose such a measure. But the more important consideration of the day is the government ability to do so. The Economic Advisory Council to the Prime Minister of India (PMEAC) has already forecasted that the government is going to miss the fiscal deficit target of 4.6% of Gross Domestic Products (GDP) for the financial year 2011-12. The deficit is likely to remain in the range between 5% and 5.5%.
There are many obvious reasons for missing the targeted fiscal deficit. Due to slowing GDP growth, revenue collections are going to be affected. In all possibility, the government would be missing its targeted proceeds from disinvestments due to the prevailing weak market sentiments. Then factors such as high subsidies on petroleum products and fertilizers, high inflation and welfare spending on employment programmes such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme are adding to the deficit. Thus, one thing is clear that the government is already bound to spend more, even if it is not fetching the targeted revenue collection. The only way the government can afford to go ahead with the populist bill in consideration is by resorting to more debt.
While several economies around the world such as Greece, Italy, Spain and even the United States are grappling with debt problems, can India afford to ignore the same completely?
India's public debt is 71% of its GDP. The interest payments eat away almost 30% of total revenue collections. All these things count when sovereign debt ratings are assigned to a country by the ratings agencies. Any deterioration leads to a difficulty in raising further debt. In addition, the incremental debt comes at higher interest rates. This in turn puts further pressure on the exchange rates. India is already facing a trade deficit. It is likely that the weakening global economic conditions may adversely affect the exports of goods and services. This would again lead to a higher-than-expected trade deficit.
Higher interest rates, depreciating exchange rate and higher deficits may adversely affect prospects of economic growth. But a bigger worry is the debt trap in the offing. The government needs to take a lesson or two from the falling economies and needs to get its act together in such challenging times After all, we have glaring examples of countries around the world which are facing the dire consequence of similar mistakes.