 "The BJP's fuzzy economic logic")
There is an inherent contradiction in the government’s thinking on key policy issues. Take, for example, the alleged desire for a strong rupee. The logic of having a strong rupee, ostensibly linked to some vague sense of national pride, is confounding in the face of the Prime Minister’s desire to transform the country into an export oriented manufacturing power house.
(Ishan Bakshi writes on economic and policy issues for Business Standard)
A cheap currency was instrumental to the success of the export-led growth model pursued by Asian economies, particularly China. In fact, the artificially depressed renminbi, which increased the competitiveness of Chinese exports, has long been a bone of contention between the US and China, so much so that US lawmakers repeatedly threatened to label China as a currency manipulator.
Some analysts argue that from 2004-08, a period when the rupee appreciated nominally, Indian exports grew rapidly. But this argument fails to highlight that global demand was at its peak during these years. Now, with China slowing down and the Euro zone and Japan in trouble, global demand is likely to remain muted for the foreseeable future. This scenario suggests that it may not even be possible to replicate the Chinese model anymore, which raises serious questions about the export oriented strategy that the government in keen on pursuing. The kinds of supply chains that exist today are very different from those five to eight years ago so maybe we should look at how we can plug into those supply chains.
The other problem is that India desperately needs to invest in infrastructure. Unless the physical infrastructure, roads, power etc is in place, manufacturing will not take off. Central to china’s transformation into a global manufacturing hub was the creation of a complementary world class infrastructure. But this was largely state funded. Emulating such a policy, as Prime Minister Narendra Modi seems inclined to, would suggest a loose fiscal policy and a tolerance for a higher fiscal deficit. But this is in contrast to the policy of fiscal restraint pursued by the Finance Minister Arun Jaitley.
A new paper by economists Peter Lindner and Sung Eun Jung at the IMF shows that Indian corporates are now among the most leveraged among emerging markets which, coupled with the fact that demand continues to remain sluggish, suggests that the private sector will likely be unwilling to launch new investments. So to kickstart the investment cycle to get growth back up to 6-7% growth rates greater government spending is required.
The consequences of sticking with the fiscal deficit target of 4.1% will now haunt the government. With growth slowing and tax revenues falling way short of budget projections, the mid-year review estimates the shortfall to be around Rs 1 lakh crore. The government is left with no option but to cut plan expenditure to meet the fiscal deficit target, but a cut in government spending will slow GDP growth further.
To be fair, with the midyear review acknowledging this, there does seem to be a rethink in the government on fiscal policy. While the government may well do a u-turn on fiscal policy, it would do well to articulate its thinking on key economic issues rather than take refuge in the rhetoric of development.
(Ishan Bakshi writes on economic and policy issues for Business Standard)