Wednesday, May 27, 2009

Spending its way out of poverty - a solution or stagnation?

In today's news from the Press Trust of India is this article:

Govt to rely on market borrowings to raise public spending: FM

New Delhi, May 27 (PTI) Finance Minister Pranab Mukherjee today said the government would continue to rely on market borrowings to spur economic growth and restore the growth momentum witnessed earlier.
"This (increased spending by incremental borrowing) would need to be further continued in 2009-10, the current year," the minister told the reporters saying fiscal consolidation could take two to three years.

"Let me say unambiguously that we are committed to restoring growth and employment and that would not have been possible without increased spending funded by incremental borrowing," Mukherjee said.

The government during the current fiscal aims to borrow Rs 3,08,647 crore, about 17 per cent more than the last fiscal.

As regards fiscal consolidation, he added, "We are equally committed to the process of fiscal consolidation over a period of say two to three years." The government since December has been trying to arrest the impact of financial consolidation on the country by raising public expenditure and reducing taxes which led to increase in fiscal deficit.

Once you take into account off budget government expenditures, fiscal deficit is already more than 10 percent of the GDP. India's debt is over 80 percent of the GDP. This move by the government will only further crowd out private investment(by eating into the chunk of private savings available for investment) while simultaneously raising the deficit. Ultimately then the growth rate won't be able to offset the debt burden. There is no rationale behind this decision by the Finance Ministry. The minister is pretending that government spending is what produced growth in India whereas it had everything to do with the economic reforms first under Narasimha Rao and then under Vajpayee. The government is taking a false step by thinking it can just spend its way out of poverty. Unless serious efforts are taken to control the deficit, our nation is going to take a severe hit in the future.

p.s: In keeping with this overspending, the Centre has already breached the deficit targets stipulated under the FRBM Act and the Fin. Min. is asking the new government to amend it to its convenience!

An excellent follow up article that clearly and elaborately explains India's situation


RukmaniRam said...

you know, that was too much for my pretty little brain.

Karthik Sivaramakrishnan said...

Er...these phrases like 'too much' and 'too good' in written language always put me in confusion as to whether its meant sarcastically or not because I don't know the tone and the phrases are used differently by Indians and Americans/Brits.

If it is not sarcasm, I shall try and explain better to address your questions

Parikshith Kumar said...

I have responded to your tag :-)

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