This is from the Kelkar-chaired "Roadmap for Fiscal Consolidation", I finally skimmed through most of the report. India is very very different and a lot what the report states is undeniably and uncomfortably true. For example,
"...a growth slowdown is inefficient, inequitable, and potentially politically destabilizing. It is the poor and the unemployed who will suffer the most in the event of sluggish growth and consequent political instability."
and
"Cross-country benchmarking suggests that India is clearly an outlier in terms of major fiscal indicators and currently has the least room for counter-cyclical fiscal policy response if conditions take a turn for the worse in global markets, second only to Egypt among 27 major emerging markets, measured in terms of inflation, real interest rates, exchange rates, current account deficits, cyclically adjusted budget balances and general government debt levels."
Perhaps the most important bit, and credit to the committee for seeming doomsdayish in their analysis, is:
"The twin deficits hypothesis implies that, given a certain level of private savings, an increase in the government deficit will have to be balanced by either a reduction in private investment or an increase in the Current Account Deficit (CAD.) The CAD then needs to be financed through external capital inflows, government external debt or drawdown of foreign exchange reserves. Government’s funding of the deficit through domestic sources tends to be inflationary. Even when the government does not explicitly use seigniorage, if the central bank has to auction government bonds and have adequate takers it needs to create enough liquidity. The RBI indicates that it has been doing so in recent years. This increase in liquidity can be inflationary….
Growth is faltering and inflation seems to be embedded. The external payment situation is flashing red lights. The global economy is likely to be more turbulent, making financing of the large external payment deficits very challenging. Potentially, if no action is taken, we are likely to be in a worse situation than in 1991 for several reasons. Energy prices are at much more elevated levels while our import dependence is now even greater. The Indian economy now is much more open and global developments have greater impact than before. India’s “demographic bulge” demands higher growth to meet the rising aspirations of our young generation. In order [sic] words, our economy may be encountering a 'perfect storm.'"
What Indian policy needs is a technocratic invasion, followed by a paradigm shift in power. But, demographics don't allow this and neither does the overall parliamentary structure and process. Moreover, political entrenchment has long since been a way of life and will continue to be so; foresight is frowned upon and comes with the risk of a loss in power that no one wants to take. One can only remember that if voluntary fiscal adjustment seems painful and inequitable, imagine how bad involuntary consolidation could be.
"...a growth slowdown is inefficient, inequitable, and potentially politically destabilizing. It is the poor and the unemployed who will suffer the most in the event of sluggish growth and consequent political instability."
and
"Cross-country benchmarking suggests that India is clearly an outlier in terms of major fiscal indicators and currently has the least room for counter-cyclical fiscal policy response if conditions take a turn for the worse in global markets, second only to Egypt among 27 major emerging markets, measured in terms of inflation, real interest rates, exchange rates, current account deficits, cyclically adjusted budget balances and general government debt levels."
Perhaps the most important bit, and credit to the committee for seeming doomsdayish in their analysis, is:
"The twin deficits hypothesis implies that, given a certain level of private savings, an increase in the government deficit will have to be balanced by either a reduction in private investment or an increase in the Current Account Deficit (CAD.) The CAD then needs to be financed through external capital inflows, government external debt or drawdown of foreign exchange reserves. Government’s funding of the deficit through domestic sources tends to be inflationary. Even when the government does not explicitly use seigniorage, if the central bank has to auction government bonds and have adequate takers it needs to create enough liquidity. The RBI indicates that it has been doing so in recent years. This increase in liquidity can be inflationary….
Growth is faltering and inflation seems to be embedded. The external payment situation is flashing red lights. The global economy is likely to be more turbulent, making financing of the large external payment deficits very challenging. Potentially, if no action is taken, we are likely to be in a worse situation than in 1991 for several reasons. Energy prices are at much more elevated levels while our import dependence is now even greater. The Indian economy now is much more open and global developments have greater impact than before. India’s “demographic bulge” demands higher growth to meet the rising aspirations of our young generation. In order [sic] words, our economy may be encountering a 'perfect storm.'"
What Indian policy needs is a technocratic invasion, followed by a paradigm shift in power. But, demographics don't allow this and neither does the overall parliamentary structure and process. Moreover, political entrenchment has long since been a way of life and will continue to be so; foresight is frowned upon and comes with the risk of a loss in power that no one wants to take. One can only remember that if voluntary fiscal adjustment seems painful and inequitable, imagine how bad involuntary consolidation could be.
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