The Common Minimum Programme (CMP) of the ruling coalition is being trumpeted as ‘reform with a human face’ but looks suspiciously like ‘populism with a bankrupt face’.
If seriously implemented, the CMP could swell the fiscal deficit from 10% of GDP to an astronomical 16-17% of GDP. Even one step in that direction will cause FIIs and domestic investors to flee, producing a stock market crash that makes the Harshad Mehta and Ketan Parekh debacles look like a picnic. Any JPC enquiry will easily identify the culprits behind such a crash: Manmohan Singh, Sitaram Yechury, and others who drafted the CMP.
Ironically, the main defence of the CMP, that the Congress can offer investors is that it should not be taken seriously, that politicians suffering from election fever say things in their delirium that they do not really mean.
CMP promises to raise education spending from the current 4% of GDP to 6%; health spending from 0.9% of GDP to 2-3%; doubling agricultural lending, providing a National Employment Guarantee Act, and debt relief to improvident states. But, Congressmen will say in private, we will carry on much as before, with more rhetoric and not much more money.
In other words, investors should not worry because while Manmohan Singh is an honest man, the CMP is a lie. This is a fragile basis for assuaging nervous investors.
Now, India has a long-run a fiscal deficit of 10% of the GDP, without the usual disastrous results because of an unanticipated flood of remittances from overseas Indians, FDI and FIIs.
Last year, these totalled close to 6% of the GDP, and painlessly financed the fiscal deficit. This has fed the illusion that deficits don’t matter. But they do: History is littered with the wrecks of high-deficit economies. If India ’s fiscal deficit looks like shooting up, expect a reduction (and maybe a reversal) of flows from FIIs and overseas Indians.
Two factors have the potential to reduce the fiscal deficit: the growing service tax and the fall in interest rates. However, the service tax still has a small base, and cannot produce thousands of crores overnight.
India ’s public debt has risen from 57% of the GDP in the mid-90s to 85% today. This has not raised the debt service correspondingly, since the interest rate on public debt has fallen, as a consequence of reform and globalisation. However, global interest rates are certain to rise. The US Fed looks like raising its short-term rate from 1% to perhaps 4% over the next year or two. Indian rates will have to rise in tandem. So, falling interest rates will cease to provide budgetary relief.
The CMP claims it will reduce the revenue deficit to zero by ‘09. But it has no credible programme to raise enough revenue to meet even the current deficit, let alone one greatly expanded by explosive spending on education, health and employment.
CMP assumes that a human face means two things: more subsidies and more public spending on anti-poverty schemes. But dozens of studies show that such spending is mostly wasted. Three-quarters of subsidies go to the non-poor, and the announcement of free power for farmers by several states will worsen this ratio. Close to 85% of funds in employment schemes fail to reach the poor, and 95% of funds spent on the public distribution system. Teachers and health workers do not attend schools or clinics.
FIIs have brought around $20 bn into the Indian stock markets, half of that since the start of ‘03. The withdrawal of a mere $700-m on black Friday caused a fall of over 500 points in the sensex. Imagine what will happen if FIIs withdraw just a quarter of their investment ($5bn). Indian investors will follow suit. Manmohan Singh needs to lose some sleep over this.
