Mirror image — Politicians should read the economic survey

Noe that so much central government data can be accessed on the Net, the Finance Ministry's annual economic survey is bound to read like ...

Noe that so much central government data can be accessed on the Net, the Finance Ministry’s annual economic survey is bound to read like a replay of bad news. But that is as far as figures and trends are concerned. The strength of the document lies in the analysis and broad prescriptions for policy.

It is the disembodied voice of hard economics hoping to be heard above the ceaseless noise in the political arena. For politicians of all streams, the survey should be obligatory reading. It warns that the high fiscal deficit is unsustainable and threatens macroeconomic stability. In short, the country is dangerously close to being in the situation it found itself in at the beginning of this decade. What is more, the whole climate in which the economy has to be managed has worsened.

There are critical differences between 1991 and now. Caught in a pincer between domestic political pressures which have weakened it and a much harsher external political and economic environment, the government has no choice but todo the unthinkable. To step back from the brink, the survey advises, it is imperative for the government to mobilise tax revenues and contain public expenditure. That is like asking the government to commit hara-kiri.

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The government will need all the support it can get in the country if it seriously intends to cut spending and raise taxes. Neither its allies nor the opposition will be batting for it. That is only too obvious by now. A serious effort will have to be made, therefore, not only in the budget but outside it to convince the country that harsh measures are unavoidable.

Robbing Peter to pay Paul never goes down well anywhere. So the government is going to have to argue its case well, choose its policy instruments carefully and stick to what needs to be done instead of backing down at the first smell of trouble. When it comes to the crunch and as long as the government is seen to act fairly, the people, if not politicians, can be trusted to react sensibly.

There are enough broad hints in thesurvey to suggest that the finance minister is inclined to turn his back on fiscal stimulation of the economy and is hoping to boost investment and demand by bringing down interest rates. The level of public debt would be unsustainable, the survey intones gravely, if the interest burden remains high. High interest rates have been partly responsible for slower industrial growth in the last year. But reducing interest rates cannot be regarded as the sole elixir for government finances or the private sector.

The infrastructure where growth has slowed remains a major constraint on growth. Nor is it well understood why consumption growth is falling. The strategy will work well only in certain conditions. For one the government will have to resist the temptation to go on borrowing, even at lower interest rates, to meet current expenditure. There must also be quick responses to the first signs of inflationary pressure in various sectors and the health of the banking sector in particular will have to be monitoredmore closely than ever in such a scenario.