The picture doesnt look rosy for a country aiming to be a economic powerhouse …
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_mukherjee&sid=a3xHFvFOj5AY
India’s Enemy Within Can Douse Explosive Growth: Andy Mukherjee
Dec. 4 (Bloomberg) –
In India, it’s easy to get lulled nowadays by the sweet sound of a zillion computer keystrokes.
Finance Minister Jaswant Singh recently asked his countrymen to celebrate the pending arrival of ``explosive’’ economic growth. Goldman Sachs Group Inc. predicts India will be the world’s third- biggest economy by 2050.
Merrill Lynch & Co. says the $505 billion economy will double in size by 2010. Seven million Indians will enter the 20 to 34- year age group every year for the next decade. As thousands of them will be competent in mathematics and English, they’ll set the stage for India to move from poverty to prosperity in no time.
But step out of the international tech park in Bangalore where glass-and-aluminum towers have names like Innovator'' and Explorer’’ and you’ll encounter an India that’s still grounded. Airports are a mess. Power cuts are frequent. Running water is a luxury. Roads, where they exist, are choked with traffic.
China has brought electricity to 700 million people in the last 15 years,'' Peter Schwartz, chairman of Global Business Network, said in Washington this month. During that time, India ended with up with 200 million more people without electricity.‘’
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The Enemy Within
So are such glowing prophecies about India’s economic growth nothing but wishful thinking? They might turn out to be if India fails to deal with the powerful enemy within: A prodigal government that takes a third of the citizen’s incomes as taxes, then crushes consumption by making them pay import tariffs that are among the world’s highest. Since all that revenue isn’t enough to service the existing public debt, the government cuts corners on the most basic services.
Then it goes and borrows still more.
According to official figures released Friday, in the first 10 months of 2003, the federal government’s fiscal deficit – what it borrows to meet its spending needs – rose 19 percent from a year ago to 1444 billion rupees ($31.6 billion). An unaffordable profligacy for a government that’s among the most indebted in the world.
Vivek Moorthy, a professor at the Indian Institute of Management in Bangalore, uses a marker that shows an even more disturbing picture. He suggests you look at primary deficit, which is fiscal deficit minus interest payments.
`Cause of All Debt’
This indicator forgives the government’s past sins – reflected in the interest cost – and focuses on its current spending behavior, which is appalling. So far this calendar year, the federal government has clocked a primary deficit of 419 billion rupees, 46 percent higher than a year earlier.
``Primary deficit is the root cause of all debt,‘’ Moorthy said at a conference hosted by New Delhi-based National Institute of Public Finance and Policy.
The reason fiscal deficit is expanding at a slower pace than primary deficit is because of falling interest rates, which allowed the federal government to retire 193 billion rupees of debt in July, and replace it with securities costing at least 4 percentage points less.
Still, ``the favorable interest rate environment is not likely to offset the widening primary deficit,‘’ Moorthy says in his paper.
The effect on economic growth may be calamitous. Each shortfall makes the government borrow more to keep alive its crumbling state-owned companies and to feed its bloated bureaucracy. According to Standard & Poor’s, India’s combined federal and provincial government debt will rise to 95 percent of gross domestic product by March.
Circulate Money
That’s why Finance Minister Singh’s appeal to citizens to spend more so ``money will circulate’’ sounds hollow. Thanks to the government, each of the country’s billion citizens has a $480 debt to pay, the equivalent of an average Indian’s annual income.
A true growth explosion will be when the government spends less. Only then will most Indians – especially those who live in small towns and villages far removed from Bangalore – spend more.
High deficits are the reason Indian bonds are still junk. The only way Finance Minister Jaswant Singh can ask rating services for a better assessment is by convincing them that the government is giving up its old ways. The swelling primary deficit shows that’s not happening.
``India’s sub-investment grade ratings reflect structural economic problems that, unless addressed, are expected to eventually arrest growth,‘’ say Moody’s Investors Service analysts Kristin Lindow and David Levey, who rate India’s local long-term debt at the second rung of junk.
If growth falters just as global interest rates harden, India might fall into a debt trap – a never-ending cycle of borrowing more at higher costs just to pay old debt.
For the current generation of Indians – the software engineer in Bangalore, the stockbroker in Mumbai, the businessman in New Delhi – it isn’t what they’ll do over the next 50 years that will decide if their country’s economy will become the third- biggest in the world.
The bigger doubt is whether the governments in New Delhi and the 29 Indian provinces will mend their free-spending ways.
So far, there’s no evidence to suggest they will.
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