Policy choices and options

It seems pretty clear what the first priority, for the federal government, in terms of economic problems it needs to address, is going to be. It is going to be the issue of achieving macroeconomic stability. The fiscal and foreign exchange deficits are reaching a point where they could, by themselves, be enough to wreck anything else that might be happening in the economy. One cannot talk of poverty alleviation, rural development and even medium term growth without worrying about short-term macroeconomic stability.

It is true though that the federal government cannot afford to focus exclusively on the issues of short-term macroeconomic stability as i) there are many other pressing economic problems, ii) achieving macroeconomic stability is dependent on getting a number of other things right, and iii) how macroeconomic stability is achieved will have profound impact on the short and medium term growth prospects of the country.

Achieving macroeconomic stability is easy. All the government needs to do is to cut down expenditure to match its revenues and to block imports so that they do not outstrip exports by much. This will do away with both deficits that seem to be causing the current troubles. But this is obviously not an option. Expenditures need to be cut and revenues raised, but these have to be done in a way that they do not derail the economic process by too much, do not hurt growth and production, do not increase poverty and/or unemployment and do not limit future prospects and, in fact, they have to be done in a way that we are able to achieve sustainable growth in the future. This is the real challenge and this is what the federal government has to face.

Furthermore, there are other objectives that the federal government has to worry about. It is not sufficient that federal policies do not contribute to increasing poverty or unemployment, they have to actually work in the other direction: they have to reduce poverty and unemployment. Inflation has to be brought under control and the relatively poorer sections of the society have to be actively helped to increase their capacity to cope with the onslaught of inflation that they have been facing for sometime now.

So the federal government has its work cut out. The hope is that they will i) not focus exclusively on the short-term, and ii) chart out a sustainable and realistic path for the country for the next few years. So far the federal government has not given any signal that they are working on these issues.

Tight monetary policy from the State Bank will only go that far. It is the fiscal and planning side, in control of the Ministry of Finance and the Planning Commission, that have to step up to the plate. So far, the government has just been focusing on trying to beg and borrow money. Again that could be a short-term relief measure, but it will not be sufficient to create macro stability and it will not be sustainable. We look forward to seeing a more coherent, articulate, realistic and worked out plan from the government over the next couple of months.