The UPA’s second term, new clothes for an old Emperor?

The new Congress led government has indicated its priorities and areas of action as outlined in the President’s speech, Thursday. It reads as a continuation of the expansionary policies, followed by the UPA hitherto. While the idea of food security with subsidized food for the poor is a good one in a country which boasts of the highest concentration of poverty in the world, other spending plans read more like pork barrel politics, than serious economic programs.

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The fiscal deficit increased to 6.2% of the GDP in the year ending March 31st. However this does not take into account the oil bonds, bank loans write off and such ‘off budget’ items. Taken together the deficit would soar well into the double digits. Such high levels of deficit are unsustainable in the medium term. Indeed after a bout of fiscal profligacy in the later eighties the economy was left on its knees and had to go to the IMF hat in hand to be bailed out. In the current international scenario many countries are busting their budgets like there was no tomorrow. The IMF has its hands full of failing economies in Eastern Europe and other parts of the world. Thus India would find it difficult to get fiscal succor if it gets into trouble.

On the bright side, the government proposes to narrow the burgeoning fiscal deficit by selling minority stakes in State-owned companies as also by encouraging foreign direct investment. In a world of increasing capital mobility when Indian firms have made big ticket acquisitions across the world, this sounds like a tired old mantra from the Nineties of the previous century. Further, battered by the free fall in the global economy investors across the world are chary of putting their money anywhere than in commodities, least of in Indian public sector companies of dubious value. Again, with the government itself resorting to heavy doses of borrowing to shore up its sagging finances, domestic investors are likely to be crowded out of the market. A sure indicator of this is the banks’ reluctance to reduce interest rates.

Wholesale price inflation slowed to 0.48% on an annual basis, for the week ending 23rd May, a bright spot in an otherwise gloomy scenario. However on closer examination even this is not so comforting after all. Lack of inflation can also mean lack of enough demand. The flip side of this is that once demand picks up, so will inflation, particularly of commodities. In any case large deficits as seen in the last two years are bound to fuel inflation. Thus whichever way one turns one is faced with a daunting economic hurdle, while the government’s cavalier handling of these serious issues leaves one a sense of déjà vu. As he steps into his second term, the economist in Prime Minister Manmohan Singh would do well to remember that in order to get rid of poverty, the challenge is not to make the poor rich but to make the poor productive, to quote Peter Drucker.