Tuesday, March 3, 2009

The Indian Fiscal Deficit Story

The Congress is back to its election propaganda with its so called " Common Minimum Programme"
This programme "ensures" that "AAM AADMI" has employment, daily meal and access to education.
So what did the UPA do?
It waived off Rs 60000 crore loans to the farmers. They got many applauds and importantly " dedicated vote banks" for doing that.
What it has done is created a LEGACY. Now, no matter which party is in power, they don't have a choice, due to the populist nature of Indian politics, every Government would need to continue this policy. THE RESULT - USD 12 Billion fiscal pressure on the Government

A hypothetical situation is the SC/ST Reservation system in India. It started in 1950, and there is no way , its going to end anytime soon.

I am not surprised by this LOAN waiver scheme by the UPA. I am used to illogical political judgements from Congress. What hurts me the most is that- Manmohan Singh approving it. He is the same guy who liberated our economy in 1991 - ( the reason why we are a superpower today ). Such an irrational decison from such a rational person is shocking.

What is UPA doing under CMP is reducing the price of Petrol& Diesel.
What is Government is doing is " They are adsorping losses by selling petroleum products cheaper and to compensate these losses they borrow money from the world ". This is done by using a financial instrument called OIL BONDS. Oil bond is nothing but “postponing the pain & Problem for another other day.
Total withstanding OIL Bond commitment on the Government is around Rs 5.5 Lac Crores or
USD 120 Billion. Does anybody have any clue, how are we going to pay for this.

And to maintain their populism, further reduce the price of petrol & diesel.
Who will eventually have to bear the burden of this irrationality - THE COMMON MAN !!!
and we talk about CMP - Hilarious

What does all this eventually boil down to ?

They increase India's Fiscal deficit - Now what is Fiscal Deficit

- Fiscal deficit is essentially the difference between what the government spends and what it earns. It is expressed as a percentage of GDP.

India's fiscal deficit in 2007 was 3.17% of GDP. ( thats a staggering - 1.40 LAC crores ) India's fiscal deficit continues to be one of the highest in the world.

S&P - the most respected rating agency in the world recently revised India's status from STABLE to NEGATIVE. The reason - because of our fiscal deficit.

This rating is a key parameters for funding institutions like WORLD BANK, International Monetary Fund ( IMF ), use this rating to decide on funding a country or a project. SO the implications of S&P ratings are quite clear.

We all applauded the Government for reducing the price of fuel last month. But ask yourself, is it correct and rational. Wouldn't you rather pay a buck or two etc instead of enjoying this cosmetic luxury.

Take a call now. Fiscal deficit is going higher & higher, and there will be stage like 1991 when India is bankrupt again.

1 comment:

Anonymous said...

I consider high fiscal deficit a sign of development and growth in a nation.
High Fiscal Deficit shouldn't be a problem for a stable country like India.
For Pakistan, yes its a biggie