ECONOMIC CHALLENGES FOR THE NEW INDIAN FEDERAL GOVERNMENT

Economic de-growth coupled with increasing unemployment, widening social and economic inequalities, high inflation, increasing corruption, low wages, etc., are generally the key factors that contribute to growing Social unrest in a society. Unfortunately, the country is gradually and steadily drawn to the brink of social and political unrest with some non economic issues as well with regional bandits and extortionists in the guise of politicians emptying public finances and resources through quid pro deals with shady business houses, demanding large protection moneys from business houses thereby poisoning business climate in the country, instigating social unrest for regional autonomy, injecting racial and seudo-secularistic venom among people, brazenly and overtly supporting (onion, pulses & sugar) hoarders, using autonomous government agencies to settle personal scores and so on.  The new Indian Federal government to be sworn in May or June 2014 inherits bountiful economic, political and social challenges from the inept & corrupt outgoing UPA2 government. Hence, contrary to the demands of investment and business communities for big bang reforms instantaneously after assuming office, the new federal government may not be in a great situation to prioritise the economic challenges ahead of existing political and social challenges.

The key economic challenges for the new government are reviving the economic growth cycle, Fiscal consolidation by boosting tax revenues coupled with sustained reduction of subsidies and non-revenue expenditure, sustaining the improvement in the current account deficit, complementing anti-inflation efforts, improve governance; infusing dynamism among bureaucrats, instil confidence in the government machinery, improving co-ordination among different ministries and government bodies, removing bottlenecks for foreign and domestic investments and credible measures to counter the much- feared impact of El Nino.

However, the new federal government may be in a piquant situation very often subsequent to assuming office, with state governments demanding higher share of revenues to subsidise their populist pre-poll promises as well they may oppose some key economic policy decisions (importantly, the Implementation of GST across the country) which may not auger very well for the revival of the economy. Moreover, if the government choose to expedite capital spending to orchestrate a cyclical turn in the Investment cycle and boost long-term growth, the short-term casualty will be the debt/Gross Domestic Product (GDP) ratio, which is a catch 22 situation for the Federal government.

It is widely speculated that most of the economic data furnished by the government agencies in the recent years is neither credible nor reliable due to possible sovereign rating (by rating agencies) down grading fears. Hence, in the highly optimistic scenario, India can achieve only a REAL growth rate of 4.6% in FY2014-15 and 5.4% in FY 2015-16, considering all the social, political, Economic and natures (El Nino) challenges.

COALITION POLITICS VEILING INDIA'S ECONOMIC GROWTH

The federal governments in India since late 1990’s are dominated by coalition politics due to mushrooming of many regional leaders with notional national vision coupled with the inability of the National parties to strengthen and widen their influence in all the regions with diverse linguistic, religious and developmental/ regional growth issues.  

The compulsions of coalition politics in addition to the intermittent elections to either the National parliament or State assemblies had a tremendous impact on the India’s economic progress. Every Indian Finance Minister, since the last decade, was in a catch 22 situation to balance the budget to appease the coalition partners as well as the poor sections of the Indian society to garner the votes on one hand and on the other hand not to derail the Indian economic growth.

P.V.Narasimha Rao’s government, during mid 1990’s, with Dr. Manmohan Singh at the helm of Finance ministry, gave the necessary momentum to the Indian economy by easing measures pertaining to inflows of foreign funds and investments, gave impetus to investments in Private sector, facilitated divestments in public sectors companies to enhance spending on non-existent infrastructure, as well as Industrial, fiscal and monitory policy reforms etc., together with booming software industry augmented the employment opportunities, domestic demand driven growth of small and medium sized businesses, enhanced exports and India’s foreign exchange reserves. The momentum in economic growth sustained despite change of Federal governments. Nonetheless, all the federal governments succeeding P.V.Narasimha Rao’s government were coalition governments and economists cautiously note that successive governments neither presented formidable economic reforms nor imparted the required growth impetus as warranted by global economic dynamics. However, It is widely believed and acknowledged that Indian economic growth since the last decade at around 7-8% is despite the successive federal government’s sincere efforts.

ECONOMIC CONCERNS

NON-REVENUE EXPENDITURE: Non-revenue expenditure coupled with ever increasing, non-directional and porous social expenditure including populist subsidies continuous to be the major hindrance to the economic growth of the country. This unproductive expenditure has been widening the country’s fiscal deficit to intolerable proportion of India’s GDP.

REVENUE GENERATION: Indian Finance Ministers, in the 1980’s and 1990’s, were relying heavily on increasing revenue receipts through rise in Income tax, Customs duty and Excise duties, when economic growth was mere 2-4%. Moreover, the Income tax payers base till the new millennium remained in single digit percentage of the population.

However, the computerisation of accounts and networking of government agencies had widened the tax net to considerable levels which facilitated increased direct and indirect tax receipts.  Additionally, acceleration of Indian economic growth to around 8% had eased the pressure on Indian Finance Ministers to unilaterally increase the direct and Indirect taxes with every passing budget. Every Indian Finance minister since this millennium had either eased the Income tax and customs duty rates or increased the slabs for Income tax or minimised the indirect tax rates on some of the popular products used by the common man, thereby facilitating increased domestic demand driven consumption related growth. Moreover, the introduction of Service tax as a new source of revenue generation eased the direct tax burden especially on lower middle class, middle class and higher middle class population in this country.

FISCAL & ECONOMIC MEASURES & REFORMS: Acceleration of Indian economic growth to around 8% was possible essentially due to Industrial and services sector growth with Agricultural sector growth stagnating at very low levels. Additionally, Indian economic growth had been involuntarily coupled with the global economy in the past decade, vis-a-vis foreign fund inflows and investments; product and services exports; strategic technology tie-ups and partnerships; raw material, equipment and country’s indispensable energy imports. However, the global financial crisis in 2007-08 and financial crisis in Europe in 2010-2011 coupled with high inflationary pressures in India had its decelerating effects on India’s economic growth, which needed timely and well oiled fiscal and monetary policy measures together with Industrial, Agricultural and services sector reforms from the Finance minister, in FY 2011-12. However, the vital policy measures and reforms had become hostage to the hostile coalition politics which unfortunately resulted in the India’s growth slipping to circa 6%.  In addition, the financial aid demands from Federal government from coalition partners for their states, to aid populist measures, have alarmingly increased in the recent years.

The slither in the economic growth and lack of fiscal prudence means loss of confidence by overseas investors resulting in reduction in foreign fund inflows, which will further result in reduced investments and working capital requirements in the vital sectors that will make Industrial and Services sectors vulnerable.  This furthur reduces revenue generation by government, increased expenditure and widening fiscal deficit. Additionally, the widening fiscal deficit will further de-value the Indian currency thereby making the essential energy related imports very expensive and shall elevate inflation. The combined impact of deceleration in economic growth and lack of Fiscal prudence is unfortunately very daunting.

The Union Finance Minister, with a right perspective, identified five objectives with obligatory measures to be addressed effectively in the ensuing fiscal year (2012-13) to give the much needed impetus to the economy. However, the onus firmly lies on other coalition partners as well, to bury their petty political ambitions and short sighted interests in the long term interests of this mighty and vibrant nation.