Economic Pressures before India

Why in news?

Union finance ministryhas announced that the government remains committed to the revised fiscal consolidation path.

What are the pressures before Indian economy?

• The rupee is among the worst-performing currencies in Asia over the past year, partly as a consequence of this trend and also as a result of crude oil prices putting pressure on the current account deficit (CAD).
• The direct tax buoyancy has been good, with more taxpayers also coming into the tax net, the indirect tax situation is less clear.
• The government’s delays in disbursing the integrated GST pool are one indication that indirect taxes may be difficult to budget around for some time.

What is government’s plan on the economy?

• Union government plans to keep the fiscal deficit at 3.3 per cent of gross domestic product (GDP) for the ongoing financial year.
• Which would be accomplished without any squeezing of capital expenditure, as 44 per cent of budgeted capital expenditure had already been spent.
• It is clear that the external account, while weak, is not in a danger zone yet, but even so the government has also announced a five-part plan to control the CAD.
• Manufacturing companies are permitted now to borrow externally even if the loans have a maturity of a single year instead of the three-year requirement earlier.
• A hedging requirement for external commercial borrowing for infrastructure has been removed.
• An unwise limit on foreign investment in corporate bonds has been lifted.

What are the issues with government moves?

• The government’s expression of confidence in the economy comes at a time when global concerns are hitting all emerging economies, and particularly causing currency depreciation.
• Many aspects of 5 year plan on CAD plan are familiar, as they are similar to methods introduced in 2008 and 2013, when too the CAD was ballooning.
• But such packages that only short-term capital flows can solve the problem India finds itself in.
• The reversal in trade liberalisation that the government has undertaken over the past years intends to continue, will only be seen as an indication of policy instability by global investors.
• Rather than making India look attractive, it will cause stable capital flows to dry up.

What is the way forward?

• India needs to encourage stable capital flows, as hot money is naturally volatile and leaves the economy vulnerable to episodes such as it is currently undergoing.
• Thus a rethink is needed, Instead of import controls, an exports boost is needed.

Source: Business Standard