Economics 101

The fall in the rupee will not make our exports any more competitive because most of our exports are dependent on materials which we first have to import.

The Indian software engineer will become cheaper and that will help the IT companies but that’s that.

Removing economic policy from the hands of elected representatives should make economic policy more efficient (technocratic government of Monti in Italy, for instance). Right now, the decisions right for the economy, such as passing on the burden of increasing fuel prices, aren’t taken when there are elections at hand. In India, there are elections almost every year. So, figure that out.

Ironically, the same person who complains about the food security bill adversely affecting our fiscal deficit doesn’t seem to care about the effect fuel subsidies have on our fiscal deficit. You lose the right to complain about welfare policies the moment you blame the government for increasing fuel prices. Wrap your head around that piece of logic 😉

The finance minster has assured us and the markets that the food security bill will not have any major impact on the fiscal deficit. While that is pleasing to note, what is worrying is the adjustment of other expenditures which that requires. The expenditure on say, health, education, and infrastructure, might have to be diverted to fund the the expenditure of food security bill. Additionally, what is left to spend on infrastructure might also get diverted from roads and highways and power generation to FSB facilitators like food storage facilities.

In summary, the food security bill didn’t bring the rupee down but it may slow down the development of our productive capabilities and hurt our growth in the long run. The opposition parties continue to mention the decline of the rupee and the food security bill in the same breath for the simple reason that they are worried about the capacity of the food security bill to buy votes, and that’s a genuine worry for them.

Speaking of investments in productive assets for the future  vs welfare for the masses in the present, have you read my tongue-in-cheek article?

I will conclude for now with the words of the Hindu editorial team:

“The truth is that big institutional investors have an inherent bias against welfare expenditure. Psychologically, market players seem to assume that any welfare scheme is bad for capital. This is a flawed assumption because the history of the market economy in the West clearly shows that a strong welfare framework has played an integral part in the expansion of capitalism. There is also a lot of hypocrisy in the way market players view government support to various sections of society. They reject loan waivers to farmers but welcome the massive loan restructuring and postponement of repayment obligations done for big business… As Jean Drèze and Amartya Sen have convincingly argued, nowhere has capitalist growth preceded improvement in human development indices. The market needs to internalise this reality.”



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