RBI

Introduction to Fiscal Conservatism

If I earn 50k a month it means that I should ensure that I don’t spend more than 50k a month right? Sounds simple enough? Absolutely.

To not spend more than what you earn is a simple enough principle and a very important principle. Unfortunately many countries including ours fail to realize that. Sadly, as the Eurozone debt crisis shows the failure to follow such a simple yet powerful principle can lead to very undesirable consequences.

Greece just kept spending without keeping in mind how much it got in and in the end ended up without any cash whatsoever. Italy too faces a major debt crisis. Given that Italy is the 7th largest economy in terms of GDP it is sure to have ripple effects on the European and World Economies.

Coming back to the Indian context, today every child that is born in India is born with a liability of Rs.25,000 per head. In short, India has a significant deficit. Yes it isn’t as dire as Greece but the deficit is one of the issues we need to be seriously concerned about.

The Fiscal deficit also plays an important role in deciding the larger investment climate in the country, the credit rating of the country and how attractive India is as an investment destination.

The world faced a major economic crisis in 2008 due to the near collapse of the banking and housing sectors of the US economy. Today there is a crisis in the Eurozone.

What the Manmohan Singh reforms of 1991 showed is that liberalization, globalization and privatization are the way forward. Yet despite its significant advantages India is still not as open as it should be with respect to foreign investment.

We need to embrace competition, not shun it. Competition is what keeps companies on their feet, gives them incentives to innovate to stay ahead of the competition and reduces costs and cuts out inefficiencies. We need to open up our markets more and allow foreign investments. Steps like FDI are a step in the right direction. Sadly, the govt didn’t see it through. By bringing the proposal and withdrawing it a few days later it sent out a very bad signal.

What we see today in the economic slump is that there are people who have capital but are simply playing safe and not investing because they are not confident in the conditions.

What we need to do is to reform our taxes. The corporate tax levels in India are unreasonably high. It is 30% for Indian companies and 40% for foreign companies and to that add a 3% education cess. A huge tax to pay indeed for any company or enterprise. Tax wise the incentive to invest is low.

What we need to do is reduce our taxes and get people to invest in the market. A reduction in the corporate taxes would provide incentives for companies to invest more capital, and as a result creating more jobs and providing an investment friendly location.

What we also need to do is cut down on bureaucratic inefficiency and stop engaging in populist policies. The 70,000 crore farm loan waiver is a prime example. It drained a huge amount from the exchequer, added a huge amount of debt and did nothing to the farmer who is suffering on the ground. We need to improve the conditions for agriculture growth, engaging in giving sops that sound good on paper but are just populist schemes aren’t necessarily the way to go.

A lot of money in India is spent unnecessarily. We need to reign in on them. We need to make our systems already in place more efficient and thus cut down the budget. We need to look at programs and ask a question “Is it worth borrowing money to run this program?”.

Typical examples of unnecessary spending are spending crores on statues, giving sops like Free TV’s, Free Saris etc. They essentially bankrupt the states finances and do nothing in the long run.

We still have an old elitist view towards some sectors like the aviation sector. We simply overtax. It needs to be reduced. When all the major airlines end up in the red you know there is something wrong going on.

The way forward should be to “be fiscally conservative, reduce taxes and attract investment.”

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  • No, I don’t think India needs FDI. Sure,by the economic point of view India can shorten the deficit but by a consumer point of view, we don’t want to be dumped with more foreign products. You see, in India, a population of 1.2 billion people, there’s always someone to buy the products. Hence, more profits for the foreign companies. We may get back some of the profits via taxes but before you’ll know the Euros will be flying high again and India would be in a stagnant pool of its own misdoings