Govt Should Restore Balance In Macroeconomy

• For the last 2 years, economic growth average at 4.7%.
• Gross fixed investment has increased by 0.2% in 2013-14. Manufacturing output has decreased.
• Although economic growth is collapsing, an average inflation of 7.1% indicates stagflation.
• Current account deficit (CAD) has dropped by 1.8% driven by restriction on gold imports.
• Priorities of the new govt in the first budget should be:
  • Restoration of macro-economic balance.
  • Accelerating investment and growth.
  • Addressing structural factors driving agricultural prices.
  • Improving the trends in the fiscal situation.
  • Addressing the problems of non-performing assets (NPAs) and capital adequacy of public sector banks (PSBs).
• To ensure clear accounting of fiscal deficit, the new govt should achieve the FRBM (Fiscal Responsibility and Budget Management) targets of 3% for the fiscal deficit and 0% for the revenue deficit within two years, by reducing consumption expenditures and subsidies (esp petroleum related).
• Post facto changes in tax laws and badgering of corporate tax payers had led to reduced faith in the govt. This must be dealt with, and progress should be achieved in implementation of Goods and Services Tax (GST) and simplification of income taxes.
• PSBs were forced to provide credit to infrastructure projects without sufficient long-term financing, delaying the day of reckoning in the form of NPAs. Banks should be recapitalised by immediately reviving their ability to lend new borrowers.
• To finance recapitalisation without worsening the fiscal deficit, govt holdings should go to below 50% allowing sale of govt equity.
• Surge in inflation is attributed to increased agricultural prices, which averages at 11.5%. Steps to revive agriculture:
  • Minimum support prices must be effectively controlled, stock build up that has caused double-digit prices increases in wheat & cereal prices should be corrected.
  • Food Corporation of India should be reformed.
  • Considering the sub standard monsoon predictions, a stable system of import tariffs and export duties must be taken.
  • This will moderate inflation, encourage farmers to invest in production improvement.
• States should be convinced to abolish Administered Price Mechanism or to remove vegetables and fruits from its purview.
• Policies and regulations in the infrastructure and energy sector must be independently reviewed.
• Read at: http://www.thehindu.com/todays-paper/tp-miscellaneous/tp-others/restore-balance-in-macroeconomy/article6018606.ece

Exams Perspective:

1. What is macro economics?
2. What is Fiscal Responsibility and Budget Management Act (FRBMA)?
3. GST
4. Stagflation
5. FII
6. Administered Price Mechanism
7. Current account deficit (CAD)