This is the other side of globalisation that we see. The
Euro, the common currency for Europe, which was hailed as a significant step for
integration of the European economy when it was implemented, is now in danger of
having countries break away from it. It was a well-known fact that the European
Union consisted of diverse economies — some well-developed and economically
conservative, while others not so well developed but profligate in their
spending without having the economic resources to do so. Conservative Germans
are rightly indignant at having to bail out profligate Greece, but because of
the Euro, and the impact on their banks and economy, have no choice but to
support Greece. Greece has its hands partly tied in tiding over the crisis
because it is part of the Euro, and therefore unable to devalue its currency. It
naturally expected the European Union to bail it out.
India too has important lessons to learn from the European
crisis. India is similar to Europe in the sense that India too consists of
various states having a common currency, just as Europe consists of various
countries having a common currency. Each state has its own finances and
expenditure, just as each country in Europe has its own finances and
expenditure. Just as Greece merrily continued to spend, without the requisite
revenues, relying totally on the European Union to bail it out, in India too we
have various states which have launched various populist programmes without the
funds to sustain such programmes, hoping that the Central Government would bail
them out if they were to land in difficulty.
Perhaps the one major difference is that the Indian federal
revenues and the federal expenses are a far higher percentage of the total
Government revenues and expenses than the common revenues and expenses of the
European Union are to the total European revenues and expenses. Also, in India,
certain major economic decisions are taken by the federal government, which
decisions may be the prerogative of the individual countries in Europe.
The Greek crisis was caused by the fact that during the
economic boom, Greece did not use the opportunity to carry out much-needed
reforms. Tax evasion is still rampant in Greece, resulting in significant
leakage of tax revenues due to the government. The Greek government has been
merrily spending without regard to its revenues, thereby running large deficits.
In India too, the reforms agenda has been lagging of late.
Tax evasion is still fairly high, though it has reduced in recent times. The
Indian government’s increase in spending in recent times probably outshadows
that of Greece. The fuel subsidy, the fertiliser subsidy, the food subsidy, and
various other schemes have resulted in drastic increases in the government
deficit. The worry is that there does not seem to be any significant efforts to
reduce the deficit through reduced government spending. So far, the government
has been able to manage on account of one-time collections, such as
disinvestment of public sector companies, auction of telecom spectrum, etc. The
question is — how long can sale of capital assets continue to sustain government
expenditure ?
Sooner or later, the government will run out of options and
have to either increase taxes (which seems difficult under the current
scenario), improve tax compliance, or reduce Government spending (which again
seems unlikely, given the populist measures that are generally resorted to).
Improvement of tax compliance to boost tax revenues seems the only possible
realistic way. Such measures will be required, and we cannot bank on the fact
that since we are currently growing at a brisk pace as compared to the rest of
the world, and are a popular investment destination, we would be immune from
similar economic crises. It does not take long for business confidence to
evaporate, and it is far better that we take measures before we are forced to do
so.
We are fortunate that we have an economist at the helm of
affairs of our country in such times. However, given the fact that the current
government has to adjust to the whims and fancies of other political parties in
order to survive, the room for much-needed reform is practically limited. Can
our opportunistic politicians not cast aside their personal greed and agenda for
the time being, and act in the country’s best interest by supporting the
government in its economic reforms ?
Our economy is already feeling the effects of the European
crisis. Our stock markets have stumbled, the rupee has become volatile against
other currencies, and exporters to Europe will shortly start feeling the crunch.
Foreign capital may flow out from the Indian stock markets to safer assets.
Interest rates and inflation may move up. One does not know how long the problem
will continue and how much the European economy will worsen before things
improve for the better.
The silver lining in the crisis may be that the bubble in the
Indian real estate sector, which was primarily caused by inflows from abroad,
may deflate, causing real estate prices to return to reasonable levels. One
hopes and wishes that the Indian economy continues its steady growth without too
many hiccups.
