Recently, noted economists and former finance ministers, namely Mr. Jaswant Sinha, Mr. Arun Shourie, Mr. P Chidambaram and Dr. Subramaniam Swamy have attacked finance minister and prime minister for mismanaging economy. Some has blamed demonetisation for the slowing of economy. Others have suggested poor implementation of recently introduced Goods and Services Tax along with demonetisation to be responsible for low GDP figures. Apart from poor GDP number, critics have pointed out high unemployment, contraction of manufacturing sector, distress in agriculture sector, disruption of informal business opportunities all may be linked to poor GDP growth or contributed to it. Add to this distress high price of petroleum products also came under criticism. Though several others including prime minister of India have indicated that because of structural change in Indian economy there is a temporary slowdown, which will very likely recover soon.
I do not pretend to be an economist. I decided to study to get a better understanding of economic issues. In the best of times economy of India is as complex a subject as the country itself. Many people with great erudition have devoted their life in understanding and managing Indian economy. My understanding of the subject is rudimentary. Like every average human being, I understand than one should spend only as much as he / she earns. Otherwise, one may have to borrow and one may get into a debt trap if he / she cannot service his interest and payback his loan on time.
I started to read on the net about the state of Indian economy. I learnt that like an individual, government also borrows money and has to payback loan amount with interest. Fiscal deficit is a term that reflects difference between government earning and government spending.
Fiscal Deficit = (Government Spending – Government Earning)
Most governments borrow money for social spending, for infrastructure development and for many other reasons in national interest. Government issues a guarantee to borrower that it will return the money, by issuing government bond. Debt servicing is a term that includes the amount a government has to pay as interest plus the capital amount upon maturity of loan amount.
Debt servicing =( Interest on borrowed capital) + (return of borrowed capital at maturity)
Ratio of Debt servicing to Fiscal deficit was 0.7 in 2009 -10. It rose to 1.28 in 2014 -15. This ratio means in 2009, government was using 70% of borrowed capital in debt servicing. In 2014 -15, government was borrowing money to payback previously borrowed money and accruing debt. This is called a Ponzi scheme.
|Debt service : Fiscal Deficit||
In the second half of UPAII government, government was losing revenue due to scams, at the same time government had to fulfil its social commitments, for example MGNREGA. So government borrowed money to fulfil her commitment and more money to pay interest and maturity amount for borrowed money. A key outcome of such a scenario is government is left with little money for spending on social schemes and government has to raise tax to generate more revenue.
Influx of money leads to inflation which touched close to 10%. While a lot has been said about slowing GDP growth in second quarter of 2017, a relatively less time is devoted on inflation data. It has been suggested that for people to prosper, atleast 1.5% difference should exist between GDP figure and inflation. As shown in table above, though growth was high between 2008 to 2012 prosperity declined due to high inflation. By contrast, despite demonitisation, we do not see an outburst of public distress may be due to low inflation and average GDP growth. However, situation may change if GDP growth declines further and inflation rises.
It is generally believed that economy takes a long time to show real time change. So one government may pay for sins of previous government. At the same time, economic sagacity of one government may be beneficial to popularity of next government. Policies of previous government possibly has forced the current government to find avenues to generate more revenue. Demonetisation, among many things it may or may not do, will bring more people under tax net. In a nation where only 2% citizens pay tax, this may be an important step to get more tax revenue. Similarly, Goods and Sevices Tax will likely force business people to declare more income and pay higher tax. Higher price of petroleum products is very likely related to an effort to generate more revenue.
We cannot ignore what people like Mr. Jaswant Sinha and Mr. Chidambaram has said on economy. They have based their arguments on existing facts. However, if is doubtful if in a politically charged environment, if these people have considered and / or revealed all facts.