In the high decibel election campaign and global meltdown, we seem to have missed the danger signals for the Indian economy that were so clearly visible in the interim budget presented by Pranab Mukerjee in 2009.
The fiscaL deficit seems to have truly gone out of control. The FRBM act mandated that the Indian govt achieve (not exceed) an fiscal deficit of 3% of GDP by 2009. Till 2008 thanks to global bouyancy and some good tax adminstration, we came very close and Mr Chidambaram had in fact budgeted a figure of 3.1% for 08-09.
But because reckless election eve sops and sixth pay commission implementation, we will end up 08-09 with a fiscal deficit of nearly 6%. The outlook for 09-10 is no different. the tax revenues are not going up much, but expenditure(non plan) is incresing continuosly. This will force the central govt to go for massive domestic borrowings and crowd out productive sectors like industry and trade from raising money to finance their expansion plans. This will lead to investment holidays in India for the next 2 years which will have long term implications for the supply side.
This will lead to a scenario, where there will be too much money chasing too few goods, domestic industry stagnating in volume terms but selling their goods at higher rates. We will have high rates of inflation and high bank interest rates. We may also be forced to import more to meet domestic demand leading to pressure on Rupee.
All in all I visuatlise a situation of 6%+ inflation, bank interest higher by minimum 3% over today' rates and us dollar at Rs 55 in 2010. We will also have higher unemployment rates.
We must all worry about the status of the nation and what Manmohan singh has brought us all to.
Kashi
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