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Deficits

Is India's Fiscal Consolidation at Hand?

Eliana Cardoso's picture

“What you don’t touch, for you lies miles away. (…) What you don’t coin, you’re sure is counterfeit.” These sophisms are voiced by Mephistopheles, under the guise of the Court Fool, in Goethe’s Faust. He aims to convince the Emperor to mint more coins, for money buys everything: parks and palaces; breasts and rosy cheeks. The Commander-in-Chief accompanies the scene and speaks his mind: “The Court Fool is wise, for he promises benefits to all.”

Economic theory, in contrast to the Commander-in-Chief, the Court Fool and other populists, states that all government handouts come at a cost – regardless of whether they are distributed in the form of subsidies or direct transfers. Financing them is only possible by raising taxes and getting into debt (or creating more money… and inflation).

South Asia Rebounds

Eliana Cardoso's picture

The future is unpredictable and yet, from time to time, we must take stock of what we accomplished and where we are heading. Over the past decade, better policies and rising integration with the global economy have pushed growth in South Asia upwards. By 2007, the peak year just before the global financial crisis, the region’s GDP growth had reached nearly 9 percent a year (just slightly behind East Asia’s). This growth acceleration extended to all the countries of the region.

The global financial crisis took South Asia’s growth down by about 3 percentage points (from 8.6% in 2007 to 5.6% in 2009). This was the smallest growth decline among all regions of the world and the prospective recovery is already underway. The World Bank expects GDP growth to recover to nearly 7 percent per annum on average in 2010-2011.

Dipak Dasgupta, a Lead Economist at the World Bank, points to four key factors that have cushioned South Asia’s growth decline during the crisis and are helping in the strong recovery.

(1) Remittances held up much stronger in South Asia than in other regions. In Nepal, the reliance on remittances is the highest, and without these flows, growth in consumption would have collapsed.

(2) The resilience of some key export-oriented sectors also helped. Garments in Bangladesh and IT software exports from India, for instance, have held up relatively well.