Clipped from: https://www.thehindubusinessline.com/opinion/needed-a-new-long-term-fiscal-policy-framework/article67373094.ece
The next government will have to feed two massive insatiable beasts, welfare and defence
IndiaтАЩs inclusion in the JP Morgan Global Bond Index has hugely enthused some commentators on and players in the money market. This news has come on top of the G20 and Chandrayaan induced euphoria. But some others, like Lokeshwarri SK, have been more realistic (businessline, September 28, 2023).
However, the overall mood in the government is of great confidence. It perhaps thinks we are so strong now that even the global bond market thinks itтАЩs safe to bet on India.
Of course, the usual caveats have been sounded. The RBI will have to look sharp and hone its skills when so much, perhaps $20 billion, gets invested in GoI bonds.
The bond market will impose fiscal discipline and limit government freedom. And so on. All these warnings are valid.
But there are some uncomfortable questions as well. Ours is an economy where the manufacturing sector contributes less than 20 per cent to GDP; where welfare spending absorbs so much money; where the tax base is so small; where government revenues increase mainly because of inflation and imports; where the data is so patchy; and where the informal sector now constitutes probably three-fourths of the economy. So a note of caution is warranted.
Confidence or desperation?
It consists of asking whether under all the confidence there is a measure of desperation. I think itтАЩs the latter because, regardless of what sort of government we get after the next general election, the need to feed two massive and insatiable beasts will not go away. ItтАЩs permanent now and itтАЩs a global phenomenon.
For all countries one beast is welfare, the other beast is defence. Welfare, because in India we have around 500 million people who need income and other kinds of support. Defence, because XiтАЩs China is behaving so badly.
As it happens, we have been here before. There is today almost a one-to-one correspondence to 1985-89. And itтАЩs not just the economic numbers. ItтАЩs also the governance bit, the need to grow faster, to ensure more equitable distribution and to keep darting between different social and political objectives, all spiced up with periodic losses in assembly elections.
Another similarity is that like Modi, Rajiv too looked invulnerable тАФ he had 415 MPs then. Modi has 303 now. He, too, was challenged by a motley assemblage of parties led by a politician mouthing morality, truth and so on. He went on to become prime minister for 11 months.
Just like now in the 1989 election it wasnтАЩt clear who would be the next prime minister in case the Congress lost. The ruling party therefore constantly asked the opposition who it would be because there were so many aspirants. The implicit answer was thereтАЩs no alternative to Rajiv.
He too, like Modi now, had wanted to step up the growth rate sharply. And he decided to finance it by huge domestic borrowings. I suspect Modi now has no alternative but to tap into foreign savings because Indian savings just arenтАЩt enough for the task.
But if RajivтАЩs was a slippery road and he stumbled very badly, this foreign borrowing road could be even slippier. Rajiv ended his term with a huge fiscal deficit and virtually no foreign exchange. The next government could end up with something similar if it gets too desperate.
ThereтАЩs one other thing. The US became very pally with India just like it has now. Five years later, it changed its mind and caused the 1991 BoP crisis after the VP Singh government refused to cooperate during the Kuwait war of 1990.
The urge to splurge
Financing growth by borrowing is fine until cheap money leads to the urge to splurge. I have finally thought of the best definition of splurging, namely, when the benefits of the spending to the country are invisible and negative. I am not linking it to the capacity to repay domestic and international debts. ThatтАЩs important but manageable.
WhatтАЩs not manageable is the tendency to confuse the country with the party. This tendency tends to grow quite exponentially. We have seen it happen before. His 1988 and 1989 budgets were stellar examples of fiscal irresponsibility designed to help the Congress.
Modi, fortunately, so far, has been fiscally very responsible even in the face of the demands of Covid and China. To be sure, there have been the usual sleights of hand but, overall, itтАЩs been okay, assuming of course that we are seeing all the liabilities.
Thirty-eight years ago Rajiv had drawn up the Long Term Fiscal Policy. It might be a good idea if the Finance Mnistry could draw up a set of likely and honest fiscal scenarios for Modi for 2024-29. He likes to think far ahead, after all.
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