"Government will have to present 'Surplus budget' with all courage in his hands to stop inflation and corruption"

Narendra Modi has been sworn in 15th Prime Minister of India. It is really an opportunity that the PM Modi' government has acquired the required strength to carry our any reform in the society to create jobs for all unemployed youth and remove corruption and inflation if they have will to do so.  First time after independence, and will not bow before the allies.

 At the ceremony, his council of ministers have also taken oath. From the economy's and the stock market's point of view, the most important individual in the cabinet is the Finance Minister. It is hard to comment what Mr.Arun Jaitly-the Finance Minsiter- will do or be able to do with his ministry because he is leading lawyer of India not economist. It appears that in growing and internationalized economy, he appears to be misfit in his job. Secondly, he has been lawyer of the corporates of India whom he has been helping in their misdeed. Thirdly, it is the first government who have no economist and ministry is fraught with either lawyer, under matric or simply graduates.

Finance minister job will not be easy in the present scenerio when the Indian economy is in doldrums . India's new FM will have no choice but to hit the ground running from day one. The new government has inherited a whole host of problems from the UPA. "high inflation,high corruption from bottom to top, youth unemployment, bureaucratic hurdles and a complicated tax structure",. While these are all very serious issues, the most urgent one is, without a doubt, the government's own finances.  or 'fiscal deficit.'

If news reports are to be believed, then the new government will present the full budget for FY15 by June end or by the first week of July. This will not give the new FM much time for preparation to the satisfaction of huge voters who have brought BJP in power. Given the serious mess that the economy is in, he will have to tackle multiple issues at the same time. However, his most important task will be to stabilse and consolidate the Fiscal deficit. 

Fiscal Deficit

Why is the fiscal deficit so important?  The fiscal deficit represents the difference between the amount that the government spends and the amount it receives. The government usually covers the fiscal deficit by borrowing money from the bond markets. This excess spending provides a boost to the economy by stimulating consumption. But this artificially created demand also stokes inflation. It must be kept in mind there is a limit to how much the government can borrow. If the government borrows too much, then it will lead to higher interest rates. This will slow down consumption as well as investment and bring down GDP growth.

This is what has happened over the last few years. For FY14 the fiscal deficit is estimated to be 4.9% of GDP. However this is an illusion as over Rs 1,000 billions of unpaid subsidy bills have been rolled over to FY15 by clever Mr.Chidamram. Excessive spending by the previous government on wasteful subsidies is to blame low GDP and more corruption and inflation. If the new Finance Minister desires to boost long term GDP growth and bring down inflation sustainably, then his number one focus should be to bring down the fiscal deficit. 

Despite all gimmick, the government and RBI  fail to control inflation despite rolling over the subsidy, cutting jobs and public expenditure which has led to fall of manufacturing growth in India to below 5% which is landmark needed to meet with the growing population @2.1% yearly. .


Interim Budget has since been presented with gimmick.  'One of the key performance indicators of the Government - fiscal deficit, has been announced at 4.6%'; much below the target of 4.8% by using the tricks like spectrum auction, PSU dividends etc, the than Finance Minister has tried to create an illusion that fiscal health is in good shape. However, the semblance of order is unlikely to last. Here is why. 

"But what is the Government actually doing with this borrowed money? The Government should use this borrowing money to create assets in order to spur growth. However, we all know that all this money is mainly going to unproductive expenses like subsidies for energy, fertilizer sector. A recent addition to this list is Food Security Bill to allure votes of poor but Congress party failed in their mission and got only 44 Lok Sabha seat in recent held election."

"Rising government debt, high inflation and slow growth will finally spoil sovereign credit profile. This will impede Government's borrowing and repayment ability further, and  fueling the all mess in the economy."Government will have to present 'Surplus budget' with all courage in his hands to stop inflation and corruption by cutting down unwarranted subsidies. 

If this is not done. It can be achieved by reducing the money being spent on various subsidies to create more jobs and infrastructure. Over half of the government's subsidy bill, is due to the subsidies given to petroleum products like diesel and LPG. This is an unnecessary subsidy as the benefit that it offers the poor is limited and richers are more. If these are done away then the government's finances will improve and the amount of government borrowing will reduce. 

Lower the amounts of borrowing will mean that the bond markets will not be flooded with government debt as it is now. Thus, there will be more money available for corporates to borrow at lower long-term interest rates. This will encourage corporates to invest more and create more capacity and further jobs to all which is the need of new BJP's government.

Higher corporate investment will create jobs leading to higher income levels. This virtuous cycle can only be realized if the government controls its own expenditure to allure voters and it must bring end to vicious cycle of subsidy and job reservation. This will be the most urgent task before the new Finance Minister when he presents the next budget otherwise he can not compete with highly intellectual 'economical outgoing team of Congress government. 
 
The BJP' government has received a decisive mandate. It must now work  decisively on the serious economic issues facing the country. All attempts should be done to ensure jobs to all unemployed youth and bring down corruption by cutting down burden of 32 subsidies-the major portion of the amount of subsidy go in the hands of bureaucracy, and inflation by presenting surplus budget for 2014-2015.



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