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Guns, butter and FDI
The President's address to the new Lok Sabha reads as if it is business as usual in pursuit of "faster growth with employment and equity". There is the expected promise of bold second generation economic reforms and further liberalisation to attract foreign direct investment to achieve 7-8 per cent GDP growth -- now that the participation of regional parties in managing the affairs of the country at the national level has yielded a stable and coherent coalition. True, but the Vajpayee government is making its second start facing a big question mark on the country's border with Pakistan (where the military has the finger on the nuclear button). With Islamabad stepping up the post-Kargil proxy war against India, the resumption of initiatives for a modus vivendi remain stymied. This is not to fault the Vajpayee government. The Indo-Pak border is live, and the government has no alternative but to accelerate military spending (thus reversing the slowdown -- alas, aborted -- attempted in the 1999-2000 budget).Deepening and broadening India's relations with the United States is a good foreign policy objective, but this will not help to normalise defence spending; besides, the achievement of a "credible nuclear deterrent", to which the government is committed (it has little choice in the matter), will be expensive.Yes, the President's address is right in asserting that the government "will ensure that India's strategic autonomy is preserved." Since this will not be costless, trade-offs in government expenditure (curbs on public investment and spending on the social sector) seem inevitable (to the detriment of employment growth with equity); unless the government garners a massive increase in tax revenues and goes in for severe expenditure control, including cutbacks in subsidies. These latter cannot be ruled out (but then it will hardly be business as usual); however, the President's address does not state the priorities of the government (as distinct from a wish-list) and stops short of a follow-up strategy. The Vajpayee government sees no need for a `guns or butter' choice. It assumes that it will have resources aplenty by wooing foreign investment. But foreign investment (especially of the direct variety) will hardly become a tidal wave unless domestic investment surges ahead. For that the latter requires to invest aggressively, unhindered by real interest rates held high by government-preemption of national savings. The scenario implicit in the President's address points to the increasing draft of resources by the government and consequently to investment-retarding high interest rates. The economy can hardly soar on the single wing of foreign direct investment. Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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