Governance Deficit-It is among the widely used terms to describe most of the problems faced by our country. However, the entire world seems to be facing enormous problems due to inefficiencies shown by the governing class.
Let us ponder the crisis that we have landed into due to the mistakes that governments have committed in the past.
The Euro-zone is facing a huge sovereign debt problem, but the harsh reality is that the leaders of the region laid the foundation of this crisis. Let's analyse the performance of the largest of the PIIGS economies.
Based on the IMF and World Bank data Italian debt has risen by close to $400 billion in the last five years, while the country's GDP has grown by slightly more than $300 billion. So, for every $1.0 dollars borrowed, the country has managed to grow by $0.75. Meanwhile, in Spain, in the last two years the country's sovereign debt has risen by more than 40% but the unemployment rate has risen from 12% in 2008 to a whopping 21% in 2011. The stats for the other three economies that are a part of the PIIGS, are not encouraging either . These figures clearly suggest that, despite increasing the national debt, these large nations in the Euro-zone have failed to stimulate their respective economies in the recent past.
Much of the borrowing is undertaken to propel the government's social sector schemes. It is the fiscal mismanagement that leads to such crisis. It is time for the political class across the globe to look at deficit management from a different angle. It is utterly unfair for the political class to undertake popular social sector schemes on the assumption that the future generation would pay for it at a later date. Social sector schemes are not an outcome of brave initiatives taken by the political class, but they are actually schemes sponsored by the future generation to boost the current standard of living. John Maynard Keynes believed that fiscal deficit helps to bring the economy out of recession. History has shown us that Keynes theory is right. Using fiscal deficit as a tool to propel growth in difficult times should be appreciated. Meanwhile, reckless spending just to win the mandate of the people for few years would make the situation worse for the nation in the long run. The PIIGS economies present a clear picture, which highlight reckless spending can potentially derail the economy in the long run.
The Italian and Greek debt to GDP ratio currently stands at 116% and 113% respectively. In the last two decades there has been a steep rise in the debts of these nations. The slowdown a couple of years back added to the woes of these countries. Now these countries have piled up so much debt that the servicing costs of the national debt hits record highs in every bond auction. Therefore, it is essential for nations to set fiscal deficit targets and debt limits and act accordingly.
India has managed to outpace most of the global economies in the last ten years. Despite such high growth rates there are several governance issues that we face on a regular basis. Socialism seems to have been deeply embedded inside in our political system. Most of the policies framed in India are based on the socialistic ideologies that are deeply rooted in the minds of the political class. Policies such as the NREGA and the Food Security Act highlight this fact. One may argue that such policies will help the nation to alleviaate poverty and raise the standard of living of the weaker sections of the society, but I have my reservations about such policies. It would be better if policies are framed in such a manner that investments flow into areas comprising the weaker sections of the society and let the benefits of the increased flow in liquidity uplift these weaker sections. It would be unfair to blame just the ruling party for passing this Act. The Act was framed by a Parliamentary Standing Committee and the bill was passed by Parliament. NREGA may have helped in job creation, but it remains one of the leading factors that has fueled inflation in the country. Increase in wages have caused a shortage of manpower, and of course leakages only makes things worse. Barring Rahul Bajaj I have not come across any other Parliamentarian to have opposed this bill. NREGA has caused an outflow of close to $9 billion for the current year. Once the Food security bill is passed, expenses would increase further. Undertaking such policies for a temporary period of time, till development work is undertaken in a particular area is justified, but having such social sector schemes for an indefinite period of time would be irrational.
Austerity measures across the world seem to receive no support from the people. Widespread protests across Euro-zone are providing signals that such measures may not go down well with the citizens of the country. Implementing austerity measures, would be a way for choosing a hard landing. However, such measures would help revive the economy in the long run. Japan opted for a soft landing couple of decades back, and till date there seems to be signs of recovery for the country. Despite lack of support, governments should bite the bullet and go ahead with such schemes. Standard & Poor's downgrade of the US credit rating definitely caused jitters across the global markets, but lets closely analyze the statement provided by the agency. The rating agency stated that the downgrade "reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."
So the downgrade was mainly on account of debt reduction falling short of S&P's targets. It is encouraging to see the credit rating agency take such bold initiatives, especially after their mismanagement during the subprime crisis. However, it was unfortunate to see the US Treasury Secretary taking pot shots at S&P.
It is time for the US economy to introspect, especially when the writing is on the wall. To conclude, I would say that the current crisis across the globe is an outcome of series of errors committed by the political class, and focus would probably shift from the central bankers to the global leaders to tackle the problems that we currently face.
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