Summary of Article by __C.R.LNarasimhan in The HINDU__
The two major economic concerns in the financial scene
With so much adverse, news about inflation, we may think that there are
no other major economic concerns. The focus on the price situation is
inevitable. With the announcement of inflation figure weekly the markets,
consumers and the political parties react. The Government, is always on the
defensive.especially, as inflation breached the double digit mark . It is not
certain whether once inflation is controlled , all our economic problems will
cease.Rising inflation is only a symptom of many deeper maladies rooted in
domestic and global factors.Presently two other macro economic developments
exist having major negative connotations for the economy.
The government finances require far greater concern although presently
not so transparent. Despite the government claims of adherence to the Fiscal
Responsibility and Budget Management (FRBM) Act, the size of the deficits has
been increasing as government resorting to the bond route, which is a trick
employed for booking major items of expenditure outside the budget.The latest
price hike in the retail prices of petrol , diesel as well as cooking gas may be
the most visible component of a package designed to bridge the gap between
domestic and international oil prices. But without generous subsidies — by way
of additional bonds to the public sector oil companies — mere price rise would
have only touched the fringes of the problem. Although other measures such as
rationalisation of taxes exist , the bond route has remained supreme.
Reports estimate , the government issuing bonds valued nearly Rs. 110,000
crore this year to compensate the oil marketing companies. Bonds have also been
issued to the Food Corporation of India (by way of food subsidies) and also as
subsidies to fertilizer companies too.The rights issue of State Bank of India
was subscribed by Govt by bond issue..The government cannot hide these items
are ‘off-budget’ and boast that they are beyond fiscal deficit by the sheer
size of the amounts involved .
. Realising this, Finance Minister P. Chidambaram had said in his budget
speech, the Govt will refer the entire subject to the Thirteenth Finance
commission as there cannot be any dramatic solution as some future government
will have to face the task of redeeming these bonds. Large fiscal deficits have
always involved a transfer of the fiscal burden over generations.
The present shock is that the government’s credibility in the public finance
area has considerably weakened making it as serious as the worsening financial
situation.All the buoyancy in personal income taxes and corporate taxes cannot
allay the serious apprehension over the fiscal deterioration. The gross fiscal
deficit of the Centre and the States will increase to well over 7 per cent of
the GDP in 2008-09 from an estimated 5.7 per cent last year.There will be other
negative consequences apart from loss of credibility. deficits caused largely
by increased subsidies will push the government’s borrowings, pushing up
interest rates. Money supply will increase and it will be difficult to contain
inflation through monetary measures. Funds will not be available for
infrastructure investment and for other essential areas,thereby slackening of
The UPA Government had legislated for fiscal rectitude earlier but except
for one year kept public finance was on course by adhering to the targets.Now
it is seen frittering away all its hard won gains on the fiscal front.
Current account deficit
The external sector had been in the pink of health, at least until recently.
and may appear that there is no threat to economic stability arising out of the
external economy. Reserves well above $300 billion continue to be healthy.The
rupee is trading within a range. Apparently Exporters and importers do not
apprehend any violent swings. but still there are lurking dangers as the current
account deficit is widening on the back of a growing merchandiser trade
deficit.Although these need not cause alarms, the following development should
allay any sense of complacency.
Recent data reveal that the trade deficit has widened despite a reasonably
impressive export performance.In April, exports in dollar terms grew by 31.5 per
cent over April 2007. Since Global trade has been slowing down this year 'it
is going to be a challenge for the exporters to keep up the tempo. Moreover,
imports of both oil and non-oil have been growing even faster. During April out
of a total oil import bill of $24 billion, oil imports accounted for a third.
Both in absolute terms as well as a percentage of imports, oil imports are set
to rise. Merchandise trade deficit has widened to nearly $10 billion in April
2008, sharply higher than the $6.8 billion compared to last year.
Worrisome as it is, the continuing trend should alert policy makers.
Although Software exports and other earnings from invisibles will continue to be
healthy, they may not be able to reduce the trade deficit as substantially as in
the past. The U.S. economic downturn will have negative impact on earnings from
software. Hence, the current account deficit too will widen to an estimated 3 to
3.5 per cent by the end of year.This will be a real cause for worry, that cannot
be glossed over especially because capital inflows that have propped up the
balance of payments cannot be taken for granted.