The macroeconomic backdrop against which this year’s financial budget will be presented tends to be - continued slowdown in real GDP growth (under 3 percent against the government’s last year’s assertion to achieve closer to 4.50 percent); widening fiscal deficit that by some estimates, if not camouflaged, can be up to 8 percent or even more; a ballooning current account deficit that is bound to exert pressure on the thinly based Pak Rupee; and continuing pressure due to inflation (projected to continue in the double digits and closer to 15-16 percent, as the government takes corrections on energy and power prices). And of course, one cannot disregard the ever-constant compulsions of a coalition government and of the looming elections’ factors, which now act as a perfect alibi for the government to procrastinate on the much needed structural economic reforms.
We Pakistanis in general have this rather deeply ingrained trait of somehow always comparing ourselves with India. Don’t ask me why! But if the economic indicators on the Indian side are also faltering, it tends to provide us, and especially our economic managers, with an excuse or a kind of a comfort zone that we are not alone in our misery and if Pakistan is faced with serious economic challenges, so is India. And it is with this very mindset that I have been recently reminded quite often that the problems one moans about are not peculiar to Pakistan, but have more to do with regional realities and global trends because India - in spite of being one of the strongest emerging global economies - is also (more or less) confronted with similar issues. During the final quarter of the Indian fiscal year 2011-12, for the first time since Lehman Brothers crisis in 2008, India used up more foreign exchange than it received, forcing the Reserve Bank of India (RBI) to drawdown from its reserves. India’s balance of payment (BOP) in this period also turned into a $12.80 billion deficit, which only a year ago (quarter on quarter figures for the final quarter 2010-11) had shown a $4 billion surplus. Although typically the value of India’s imports is much higher than its exports, the gap (the current account deficit) is largely offset by investments made by foreign investors, lenders and other inflows. As on the fiscal consolidation front, India’s numbers appear to be even dodgier. Subsequent to missing the 2011-12 fiscal target of 4.60 percent of GDP by a wide margin, even the revised figure of 5.90 percent of GDP it seems is unlikely to be met.
Though the Indian government on its part has resolved to lower it further, experts on the contrary believe that with the Indian states still quite hooked on receiving generous grants from the centre, the fact of the matter is that at the end of the day the actual fiscal deficit is likely to be much higher and certainly not lower!
India’s total national debt as a percentage of GDP is about 70 percent, which is considerably higher than that of Pakistan. However, so far, most of India’s debt is in shape of domestic borrowings, which on the down side means that its private sector is getting unfairly crowded out and, hence, its real growth potential is getting stifled, but on the upside it means that the government (unlike the case in Pakistan) does not have to worry too much about looming repayments in foreign exchange to be paid out to its international lenders.
The emerging concern for them though is that this nature of India’s debt is fast changing shape. Its rapidly rising external debt is causing headaches for the economic managers, especially when its foreign exchange reserves are depleting. In April 2011, the total reserves were considered good enough to cover 100 percent of India’s external debt, but today this coverage stands reduced to nearly 85 percent (15 percent depletion in just one year). This, in turn, is putting serious pressure on the Indian Rupee, which probably is at its lowest in the last five years.
So what should we be saying to ourselves? If India with all its industrial strength, a robust domestic consumption base, a very healthy household/domestic savings rate and with its new found status of ‘darling of the West’ can be in such a deep mess, then, by comparison, we are probably not doing so badly? The economic challenges cum difficulties we face today in reality depict a global phenomenon and, therefore, cannot be blamed on the incompetence of the present economic managers?
In all fairness, the government may have a case to argue in its defence; however, what it needs to remember is that the incriminating factor against it is not the economic hardship being faced by the nation, but the lack of vision and will on its part to successfully overcome the economic difficulties facing the country - no hope down the route! And if it is India’s excuse is what we seek, then we also need to evaluate the seriousness and sincerity with which their economic managers are busy taking some very tough but necessary decisions. A renewed drive in India to increase revenue collection that now for the first time nets the sacred cows of the past, e.g. jewellers, companies including multinationals, that collected revenues in India or made deals on Indian licences, but accounted them overseas to avoid local taxes, consumers who displayed a taste for luxury but failed to meet their tax obligations, capital gains tax on all transactions involving assets or stake in India, evolving a performance based relationship between the centre and the states that hinges for transparency and accountability of funds and the resolve of states to raise their own revenues by implementing state level value added taxes, etc.
But, in my opinion, the single most important difference that puts them apart is that the Indian economic managers are not looking for excuses and are genuinely ‘ashamed’ on their recent performance. A recent debate stirred in India by their Deputy Chairman Planning Commission, Montek Singh Ahluwalia’s poverty definition, defined poverty on the basis of daily consumption of Indian Rs 28.65 and if accepted would mark down Indian’s poverty level to below 15 percent. I had been quite impressed by the remarks of the previous Head of the World Bank, Mr Robert Zoellick, during his visit to New Delhi in March 2012, on this new proposed poverty benchmark: while it may be overdone since the World Bank itself sets a $2/day (IR 100/-) as the cut off, but for me what is important is the eagerness of the Indian policymakers to grapple with poverty in India and their mindset that their respectful place in the developed world can only be achieved by being conscious of the shame associated with poverty.
My concern is that can we also be confident about a similar mindset of our counterparts?
n The writer is an entrepreneur and economic analyst.