Feb 26, 2013

India too follows the failed global economic prescription -- Rob Peter, to pay Paul.

I have got tired of reading the same faulty prescription. The economic way forward being suggested by all and sundry is a failed model. And yet, every other day you see the same analysis, the same arguments, and the same approach being suggested ad nauseatingly. What has happened to this country? Where has our collective wisdom disappeared? Must we be cowed down by the blackmail being continuously unleashed by the rating agencies as well as the international financial institutions?

This is in reality what is meant by populism.

The populist perception is not often pragmatic. I agree. And this is exactly what I am worried about. The populist perception today is that with the fiscal deficit likely to grow, at a time when current account deficit is already galloping, the Finance Minister must ensure that the investment climate remains favourable. Stepping up expenditures is something the government can ill afford at the moment. So the axe must fall on welfare schemes.

Diesel prices have already been freed, and GAAR deferred. Taxing the rich is not the right way, and therefore the only solution these economists and economic writers have is to shower more tax concessions and freebies to India Inc.

If this was workable, and would help kick start the economy, I wonder why the same formula is not working in Europe. All the years of austerity drive, following the economic recession of 2008-09, hasn't seen the European economy showing any signs of emerging out of woods. Greece, Spain, Ireland, Italy, France, Germany and you name it. All European countries are grappling in the dark having blindly followed the IMF prescription. While public outrage has spilled to the streets, unemployment and poverty is growing. With many living in their cars, the crisis has put cash starved Greeks on their bikes. Unemployment in Greece has grown to 25 per cent. Greece is not an exception.

The reality is that the countries that imposed harsh austerity measures are deeper into crisis. In Greece, Spain and Portugal -- where austerity provides a test case -- unemployment is soaring.

International Monetary Fund (IMF) has finally admitted that it had underestimated the damage from its austerity drive. IMF chief economist Olivier Blanchard has in a paper admitted that it didn't fully understand how austerity will not be able to rejuvenate economic growth. As a caveat, and as a face saving, IMF says that austerity works well if fiscal multiplier are small, but for large economies it actually ends up increasing debt-to-GDP ratio.

Should India therefore follow the European decline?

Regardless of what is happening globally, the rich want to extract the last pound of flesh. You shouldn't therefore be surprised at the populist discourse. As the Budget day nears, the decibel pitch increases. It will reach its crescendo on the day Mr P Chidambaram will stand up to present Budget 2013. As expected, the stock markets will first register a fall (this is a blackmail tactic they have perfected) before the Budget is presented, and as the Finance Minister showers freebies on business and industry, it will rise.

But should we succumb to populism? Just because the entire public policy space is occupied by austerity hawks -- in India, they use the phrase: Spending cuts -- does not mean that we have to keep quiet and accept the faulty economic regime. It does not mean that the populist view -- Rob Peter, to pay Paul -- should be accepted just because everyone is saying so.


Concernicus said...

Sadly, it seems as if American corporatism and the insanity of austerity have infected your country. Jobs, guns and hate have been three of our largest exports. Now we can add the lunacy of austerity to the list.

Good luck to your country and your people. Good luck to us all as we battle the plutocrats.

Anonymous said...

Rightly said, Devinderji. Austerity is a mad economics experiment. Where is leads to is, with high probability, is a situation where more and more find it increasingly difficult to lead reasonably decent lives. In simple words: more hunger, unemployment, malnourishment, uneducated people, poor infrastructure and a poorer nation.