Beyond the budget

Mar 27 2012, 03:20 IST
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SummaryEconomic fundamentals are strong, but letís not take them for granted. Interest rates must reduced

Economic fundamentals are strong, but letís not take them for granted. Interest rates must reduced

From a macro perspective, the key variable in the budget is the fiscal deficit of 5.1 per cent. Even though this is a reduction from the actual 5.9 per cent in the last fiscal year, it is predicated on a GDP growth rate of 7.6 per cent. This brings us back to the probability of achieving this growth rate. Whenever policy makers are asked how this growth will be achieved, the standard answer is ó ďbut the fundamentals of the economy are strong, therefore...Ē

Of course they are strong, and just to be sure, let us list them out. First, the high consumption propensity of a vast growing middle class. This is true not just for those in the big cities but also those in the small towns and villages, and is due in large measure, to the demonstration effect percolating down from urban centres. For example, one would expect to see a large number of Mercedes, BMWs and Audis in the big cities but to find a large number of these in Ludhiana illustrates the point. Further, with television advertising all over the country, growing aspirations are on a fast track. Add to this the demographic shift towards a large, growing and literate young generation. The consumption drive, in consequence, is unstoppable.

The next fundamental is a high saving rate. It is an impressive 34 per cent, though lower than Chinaís. I am often asked in my lectures at IIT Delhi, how high consumption can go along with high saving. Keynes, in fact, showed us that in a situation of underutilised capacity and unemployment, we can eat our cake and have it too, that is, we can spend and save at the same time.

Third, we have world-class entrepreneurs recognised globally. Many are heading large banks, investment houses and corporations in the US and Europe. Others, ranging from heads of software to manufacturing, have become icons in India. However, the important thing is that the number of new entrepreneurs is growing steadily. Many represent the mid-cap and small-cap categories on the stock exchange. Others proliferate in the small towns of India. The Automobile Component Manufacturers Association alone has 250 members who represent small and medium size industries catering to the auto sector. Likewise, for others including electronic and white goods industries, there are a host

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