In a democracy like India, due to political compulsions, the government's expenditure grows inexorably and is not always based on productivity. This has resulted in larming levels of debt over the years. If this trend continues, the country may expose itself to the risk of undermining its creditworthiness, devaluing the currency, and destabilizing the whole economy. With the alarming levels of public debt, narrowing down the same has become an important issue in the country at this juncture. It would be a tight ropewalk for the Finance Minister to maintain the current growth tempo and balance the revenue and expenditure.
Experts warn that India is ignoring
its fiscal mess on its own peril.
Kalpana Kochhar, Economist with
IMF, says, Chances are that any conversation
about India today will turn
into a discussion on the rapid rise in
income and the reduction in poverty,
or the phenomenal rise of the information
technology and the ITES sectors
in the global market, or on the spectacular
growth in cellular telephony,
or on the imminent dawn of India’s
global age. At the same time, however,
India has one of the largest and
most intractable fiscal imbalances in
the world.” There are good things accompanying
bad things. The Indian
economy witnessed a fall in interest
rates on five-year government bonds
over the last five to six years. In 1999,
five-year G-Secs attracted 11.31% interest,
which has fallen to 4.86% as of
November 2003. Most economists are
still worried that economic growth
cannot be sustained in the mediumterm
unless the government puts its
financial house in order.
Economists say that a developing
country like India should run a small
current-account deficit, and finance it
through foreign capital. A current-account
surplus and rising foreign currency
reserves are signs that an undervalued
domestic currency may be
curbing private consumption and investment.
However, they further say
that tough decisions lie ahead for the
law to have an impact. India must tax
more of its people and businesses—a
politically difficult step. Besides, it
must also resist the temptation to
meet deficit targets by compromising
on investments in development to
help the poor and boost long-term
growth.
The latest government survey of
the Indian economy suggests that to
sustain a GDP growth of 7-8% the investment
rate needs to increase to
32.3% by March 2007 from 24.4% in
March 2002, with the government accounting
for 2.6 percentage points of
the increase. It further suggests that
without fiscal consolidation, such a
step up in public investment cannot
be attained. Fiscal consolidation remains
incomplete without the states’ involvement. The burden of fiscal adjustment
has to be borne both by the
Center and the states. Even the international
rating agencies have expressed
concerns about the rising fiscal
deficit and have subsequently
rated the rupee as non-investment
grade. It’s a very difficult task for the
government to sustain the present
growth tempo going by the sheer size
and persistence of fiscal imbalances
and indebtedness. |
