The three significant Macro Economic events during February 2013 in different parts of the world were:Sequester in US, Italian Elections and Indian Union Budget. Each event played out in ways that only increased the complexity of the macroeconomic conditions.
Sequester was the most awaited economic event of February. It was perceived as the single most important decision to be taken in Washington. It was approved in February and the spending cuts were going to start from March, 2013. Acceptance of sequester bill can prove to be beneficial for US because no major economy was able to find a solution either by implementing only austerity measures or only spending measures. We stressed on the point that time has come for coexistence of austerity and spending measures. It is always important that we strike the chord with perfect balance. The acceptance ofsequester bill could be one such step in right direction in creating a balance.
The election results of Italy also showed the confusion among Italians in choosing between pro – austerity and pro – spending stand of the political parties. Neither of the contending parties was able to score a clear majority to claim the honors of the house. The result indicated that fresh elections were a strong possibility.
This added to the existing economic woes of the Euro zone. The pro austerity parties did not fare that well in the elections. European leaders have pinned their hopes on a stable government in the third largest economy of Euro Zone which can guide the other crumbling economies out of crisis. Stringent Austerity measures in Greece has led to political and instability and economic deadlock. European leaders are afraid of something similar happening in Italy. The deadlock situation of Greece had a minimal effect on Euro Zone, where as the impact of same situation in Italy is going to be huge. The European leaders are likely to change their economic stance after experiencing the mixed results in Italy elections.
The Union Budget 2013-14 of India was presented under some challenging Macro Economic situation both in domestic and global front. On the domestic front India was facing challenges in curbing the mounting Fiscal deficit and current account deficit. Revival of Investment Cycle has been on cards for a while now. Though there was a clear need to address these issues, the budget did not take them head on. No major measures that could have a significant direct impact were introduced. Cutting down spending or increasing the revenue streams are not good enough to curb the fiscal deficit situation in India. Fiscal deficit is always expressed as the difference of total expenses and income streams as a percentage of GDP. The key aspect being ignored while analyzing the fiscal deficit is the effect of Inflation. The current levels of GDP are being recorded based on the high inflation rates in India. Once the inflation rate is curbed, the GDP value is going to take a hit unless supported by economic growth. Once the GDP starts recording lower values, the fiscal deficit values are going to be higher. Though high Inflation is considered as a bad sign, it helps in window dressing growth rates. Comparison of Central Government debt as a percentage of GDP and Inflation rates of various economies is shown in
India’s record high Current Account Deficit (CAD) is a major concern. The gap has to be financed by capital inflows and this makes India overly dependent on the Foreign Institutional Investments. A high CAD during the times of low growth indicates that the problem is more structural in nature. The supply blockages like shortage of coal, higher demand for diesel led to higher imports. The growth prospects of future look bleak until these issues are resolved and budget fails to address them.
Measures should also have been taken to increase the domestic savings. When it comes to savings by government, subsidies were untouched in fear of affecting inflation rates. Planned expenditure was also not decreased. When it comes to boosting the government’s income, the only step taken was to collect surcharge from the tax on super rich. It is not just the government but the households have to increase their savings rate and invest in the capital markets to boost them. The household savings rate is at low levels. Budget failed to incentivize the savings of households which could encourage them to save more.
The growth rates are only possible via investment cycle revival. High interest rate regimes prevailing in India is also acting as a hindrance for investment cycle revival. The Indian government is over dependent on RBI to boost the revival. But RBI alone cannot support the growth prospects. Reform level changes are necessary to improve the on ground situation of Industrial development in India. Finance Minister was faced with the daunting task of curbing the government expenditure and keeping the coalition happy. Any stringent reforms to control the government expenditure would have a negative effect on the impending elections. In the Income side, the fiscal deficit meant that the revenue inflow had to increase. Given these constraints, the budget can be termed as the best possible outcome. We should not expect any major policy decisions to go through before the next general elections.