The Gold Standard | Classic problems

Some weeks ago, this blog had highlighted that the message/judgement of the veteran and respected journalist T. N. Ninan (‘Business Standard’, India) on the economic impact/damage of the UPA Government’s policies was muddled. See post here.

In today’s ‘Business Standard’ he makes amends but does not go far enough to call a spade a spade. Perhaps, he does not want to be too strident. Understandable. In any case, the purpose of this post is not to pick issues with him but with the UPA government for having created big short-term (2-5 years, depending on India’s luck) question marks on the Indian economy.

He correctly identifies the issues. India has twin deficits and inflation. The third one is a consequence of the first two problems. That is, the sustained high inflation rate is a sign of sustained excess demand. Let us be even more specific. The underlying problem is not the trade deficit, for the external balance must always equal the internal savings-spending balance. The internal balance is the problem and that is the fiscal overspending problem. There is too little (right kind of ) investment and too much spending both by the public sector and by the private sector.

He credits the fiscal largesse of this government for bringing about equality (“The spending splurge has achieved greater equity”). But, what kind of equality is that? One that is based on give-aways? One that does not encourage a good work ethic and one that is based on freebies? Look at the news stories on India’s power producers threatening to refuse to pay distribution companies that have not paid for the power they had purchased.  See here, here and here.

Why are distribution companies unable to pay power producers on time? Because tariffs have not been revised for years. Why are they not revised? Politicians either do not appoint independent power regulators or, if appointed, they do not take independent but political decisions and refuse to authorise tariff revisions.

If rural and poor users of many government services begin to pay regular prices for the goods and services they consume, what will happen to equality indicators? Of course, this is only a partial story. Their incomes can and should rise. The government cannot and should not create jobs. They give us NREGA. They have to create an enabling environment for job growth.

One can go on and on. The point is not that. This blogger is not saying anything new. The economic problems that India faces are classical. They are not unique or due to the situation. They are ‘made in India’ – home-made, desi stuff, 100% indigenous. Too much consumption. Too little production. Too little productivity. Too little right investment.

When oil companies announce petrol price hikes, Ms. Banerjee threatens to quit the government. Ms. Jayalalitha had to come up with political arguments to justify increasing prices after ten years. People get upset, in any case.

One cannot blame the people for reacting with exasperation because they have not been told anything better and wiser by our politicians. If they have better economic prospects, they would take price increases in their stride but economic ignorance permeates political discourse on these topics.

In one sense, it is good that Indian politicians have brought things to this pass: it would make it difficult for them to continue on this path (at least for a while).

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.