Linking security to economic growth…

Well a useful speech by the FM. Though, it also suggests whatever is wrong with the current administration. The seeds for current fiscal mess were sowed way back in UPA-I (2004-09).

Being the home minister in first 3.5 years in UPA-II, he knows a bit about security. And as he has mostly handled the finance portfolio as a Minister (whenever his party is in power), he ofcourse knows finance. Infact, I dont think anyone understands finance better than him. Though, most of the time it is about tricks like off-balance sheet bonds in 2004-09 regime which led to lower fiscal deficit. This time it is keeping plan expenditure low and using the cash surpluses generated from lower exp to keep fiscal deficit lower. And then most people forget that the recent fiscal mess which was mainly started due to fiscal stimulus in 2008-09 was allowed under his previous tenure as FM..

First some bit on India’s security:

Until recently, we had taken a very compartmentalised view of national security. Each threat to national security was neatly fitted into one compartment. The first, of course, was a war with Pakistan. That was fitted into a compartment and was meant to be deterred, or defended, through the might of our armed forces. A war with China was, and remains, unthinkable and therefore that threat was fitted into another compartment and reserved to be dealt with through a mixture of engagement, diplomacy, trade, and positioning  adequate forces along the borders. Beyond Pakistan and China, we did not  perceive any external threat to our security. Other threats such as communal conflicts, terrorism, naxalism or maoist violence, drug peddling and Fake Indian Currency Notes (FICN) were bundled together under the label “threats to  internal security” and were left to the Ministry of Home Affairs. Some threats were not acknowledged at all as threats to national security and these included energy security, food security and pandemics. K Subrahmanyam was one of the earliest to argue that we should take a more holistic view of the threats to  national security.

Recently, eminent voices have echoed the views of K Subrahmanyam. The Prime Minister, Dr. Manmohan Singh, in his address to the Combined Commanders Conference on October 20, 2005 identified – as threats to national security – terrorism, proliferation of weapons of mass destruction, low intensity  conflicts, and threats to the security of sea-lanes. The National Security Adviser,  Shri Shivshankar Menon, delivering the Raja Ramanna Lecture on January 21,
2013 said “We now need to consider our energy security, food security,  technology security, and social cohesion and institutions, to name just a few, when we think of national security.” In another place in the same lecture, he  argued that there was little distinction between internal security and external  security and identified the internal security challenges as having ‘some roots  outside India and (is) linked to what happens outside the country.

All these threats are inter-connected:

A close examination of the threats to national security will reveal that  each one of them is connected to one or more other threats. For example, the  threat of terrorism is connected to the threat of proliferation of arms including  weapons of mass destruction. The threat to the security of our sea-lanes is  connected to the threat to energy security. Low intensity conflicts have a direct  bearing on social cohesion. Technology security will be the key to building new  institutions. Natural disasters, especially those caused by climate change, can  wreck food security. Pandemics and diseases, if uncontrolled, can diminish our  capacity to defend the borders against our adversaries or to defeat the militants  within the country. National security is, therefore, caught in a complex spider’s  web and unless we recognise that each strand of this web is connected to  other  strands, we would not be able to do justice to our fundamental obligation to  protect and defend the security of the nation.

Hmm… Interesting stuff.

He says three things needed for increasing security:

Defending and promoting national security stands on three important  pillars: firstly, human resources; secondly, science and technology; and thirdly,  money. I have placed money last, not because it is the least important, but  because it is the most important pillar of national security. Without money, we  cannot nurture and build our human resources.

He touches on the two pillars. Skipping it as not much know-how there. But worth a read for sure..

Finally linking all this to economic growth:

The last of the three pillars is money. It is also the pillar that will support  the first two pillars. Money comes out of growth. …Increase in tax revenue is, in a very large measure, the outcome of higher growth. When the economy is on a roll, tax revenues are buoyant and when the  economy slows down, the first casualty is revenue from taxes. 

It is therefore a self-evident truth that growth is the key for greater public  welfare and greater security. Yet, we adopt a disdainful attitude to growth.  Some think that the value of growth is overstated and that we would be better  off if we pursued not the goal of growth but other goals such as cultural  nationalism or debt-driven egalitarianism.

He shows how the 2004-09 UPA-I phase there was moeny for everything:

In the former phase (2004-2008), we were able  to provide for virtually everything that we desired, but also for exceptional items  of expenditure such as the agricultural loan waiver scheme. During that period,  we were also able to reduce the fiscal deficit from 4.5 percent in 2003-04 to 2.5  percent in 2007-08. When there is a slow down, the consequence is the exact opposite…

Well, there you see. It has been downhill ever since..The high growth phase is when you also do some saving for bad times. By splurging on things like debt waiver, subsidies etc one is not sure what FM means here. As I said above, this is what led to the problems for Indian economy. And despite repeated warnings, there was no one to listen till it came to a stage for downgrade. There have been just plain ignorance and lies from the top..

Infact, the disdainful attitude to growth was shown by the govt. They believed it s birthright of India to grow at 9% and they could whatever.. People have never doubted high growth but the way it is utilised. We have just wasted it all in the name of welfare…More waste has led to even more waste..

He points to differences in growth between India and China. Latter had sustained growth for more than 25 years which has led to higher security as well as there were improvements in human development and technology and ofcourse money:

It is sustained high growth that has enabled China to lift all but a small  proportion of its people out of poverty. The estimate of poverty in China is 13.18 percent; in India it is 29.8 percent, even if one adopts a helpful standard of  calorie intake. Forty two percent of children under age 5 in India are malnourished compared to 3.4 percent in China. Life expectancy at birth in India is 66.1 years, while in China it is 73.3 years. High growth in China inevitably translated into higher expenditure on security and, as a logical corollary, a high degree of security….

Again, the Chinese growth was not automatic. It was a lot of hardwork..They never really sang praises over their economy as much as we do…Work more and talk less..

Finally and thankfully he understands there is a need to lower fiscal deficit and lower rev deficit to zero. A target which was given in FRBM and to be accomplished by 2008-09. I can hardly forget and now laugh at the speech the same FM gave in 2008-09:

It is widely acknowledged that the fiscal position of the country has improved tremendously. I am happy to report that the revenue deficit for the current year will be 1.4 per cent (against a BE of 1.5 per cent) and the fiscal deficit will be 3.1 per cent (against a BE of 3.3 per cent).

Further progress will be made in 2008-09. The revenue receipts of the Central Government for 2008-09 are projected at Rs.602,935 crore and the revenue expenditure at Rs.658,119 crore. Consequently, the revenue deficit is estimated at Rs.55,184 crore, which amounts to 1.0 per cent of GDP. The fiscal deficit is estimated at Rs.133,287 crore which is 2.5 per cent of GDP. Honourable Members will note that not only will I achieve the target for fiscal deficit under the FRBM Act, I have also left for myself some headroom. In the case of revenue deficit, I will meet the target of annual reduction of 0.5 per cent. However, because of the conscious shift in expenditure in favour of health, education and the social sector, we may need one more year to eliminate the revenue deficit. In my view, this is an entirely acceptable deferment.

Pity, all this was ignored just six months later and since then it has been just about fiscal slippages. After 5 years, in 2013-14 speech he will again be looking at fiscal mess the government has created in the last 5 years. And even in 2004-09 regime FRBM was not really followed in true spirit. The fiscal deficits were lowered because of much higher growth in revenue and not cut in expenditure. The 2008-09 slowdown acted as a perfect excuse to undo all the gains made (whatever limited) in the last 4-5 years.

And what a remarkable similarity to the previous elections as well. That time there was a global slowdown which led to a huge fiscal stimulus. The numbers then were in favor. This time there is a Indian economy slowdown but ofcourse numbers are not in favor. The FM has promised that UB 2013-14 will be a fiscal consolidation one. But how much time it takes to undo the promises  as the govt. loses couple of state elections.

The whole point is the economic mess created in last 4-5 years is unlikely to go away so quickly. What needs to go up (growth) is going down and what needs to go down (inflation) is going up. Most reforms have only led to boosting equity markets which are also drifting lower as hardly anything is happening on real economy level. Even though there may be promises in the budget but there will always be suspicion over the intent. The time is too short and it is an election year. How many times does one see govt cut its purse before elections?

People who keep talking about economic fundamentals should never ignore political reality in India. It is supreme and has really weak fundamentals..

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