So, the countdown has begun. What remains to be seen is how Pranab Mukherjee, the crisis manager of the ruling dispensation, is going to manage the post-crisis situation. As he`s set to present his second full budget as UPA`s finance minister on February 26, the key question would be whether he will start phasing out the stimulus measures, announced to help the collapsing economy recover on a fast pitch. And now it`s official -- the stimuli have worked and the growth is back. Citing the rapid rebound in industrial production and changing macro economic outlook, a section of the industry, academia and even the government has urged the finance ministry to put fiscal discipline at top of its agenda and start withdrawing stimulus. Widening fiscal deficit, as a result of the government`s increasing public spending, is a symptom of an unhealthy economy, say the fiscal disciplinists.
2010 is not 2009
Presenting his first full budget of the UPA government in July 2009, the options before Mukherjee were limited and challenges galore. The global economy was still struggling with the Great Recession and India`s economic output was steadily falling. The economic expansion shrank to 6.7 percent in 2008-09 from 9 percent the fiscal before, and industrial production as well as exports was plummeting. The RBI had cut down rates and the government had already announced fiscal measures to boost demand and production. Mukherjee presented a cautious budget -- put the proposed financial reforms on the back burner, increased public spending, retained stimulus measures and avoided introducing any drastic changes in the tax structure. But in 2010, the green shoots offer opportunity for the finance minister to take imaginative policy actions. The fear mongers in the academia think the government should grab this opportunity to cut spending and bring down deficit. How sustainable would be such a move?
Let`s now look at some figures. The fiscal deficit for 2009-10 is estimated to be 6.8 percent of the gross domestic product (GDP), up from 6.2 percent in 2008-09 and 3.1 percent the year before. Deficit has started widening in 2008, the year global economy was hit by recession, as the government`s revenue reduced sharply on slowdown and expenditure grew on stimulus. Many analysts compare this situation with early 1990s when India was struggling with the twin problems of slowdown and deficit. When Manmohan Singh presented his first budget as finance minister in 1991, one of his key focuses was to bring in fiscal rectitude. The gap between the government`s revenues and expenditure shot up to 8.4 percent of GDP during Madhu Dandavate, the predecessor of Singh. In his budget speech for 1991-92, Singh proposed to bring down deficit to 5.78 percent. To achieve this, he had two options – increase the government`s revenues through liberalisation policies and cutting down subsidies.
2010 is not 1991 either
India is now a liberalised economy, but the very course of liberalisation is under strain as the western economies, including the US, the Mecca of free market capitalism, are turning towards higher regulation and intervention. There are limitations for Mukherjee to expect rapid increase in revenues as the industry is not yet fully out of the woods. Cutting subsidies is also not a desirable option at this time as such a move would force consumers to cut down on their expenditure, resulting in a slump in demand in the domestic economy. In this recovery time, anything but a demand slump could be tolerated. After all, the policy options of the government are almost used up. It has already pumped in millions of rupees into the financial system through stimulus and has kept the interest rate at record low for over a year. So, another financial shock will leave the government defenceless. That’s why many say, the trouble shooter is in a fix. What can Mukherjee possibly do?
Excess breeds collapse
According to many economists, including Nobel Laureate Paul Krugman, the administrations committed to fighting crisis should not give in to “fear mongering” on fiscal deficit. Krugman says deficit itself is a symptom of slowdown. Any policy action to bring down deficit when the economy was still in sort of a slowdown would be counter productive, he writes in his blog. Though Indian and Chinese economies seem to have overcome the worst, the prevailing crisis in Europe and the possibility of it spreading across the Atlantic still make many scared. The capital markets are still shaky and have plummeted recently on Euro-collapse fears. ‘The Economist’ magazine writes if 2009 was a crisis year for the financial sector, 2010 could be crisis time for the economy as a whole. And Europe indicates just that.
So, it`s not the time to play to the gallery. Mukherjee needs to be imaginative while formulating policies for the difficult times. He has to keep the growth rate steady without letting excess liquidity build more bubbles. Excess breeds collapse and that needs to be kept under constant check. A difficult task, indeed.