Tuesday, November 01, 2011

Rob Paul to Pay Peter

India's economic situation is perhaps a classic example of Crowding Out. Economics 101. I'm surprised why no one has pointed it out yet. On one hand where our political class is behaving like a drunk on a binge, the wise bureaucracy, RBI is is trying to make up for this bad behavior by smothering growth.
Fiscal Irresponsibility.
- 6th Pay Commission
- Right to Food Act
- Waiving of loans

The govt is simply pumping money by doling out goodies to middle class(pay commission), farmers and laborers. No wonder this is stoking inflation. Part of inflation might be due to high commodity prices, but most of it is inbred.
Monetary Strangling
- 13 Interest Rate Hikes in the last 1.5 years.
In order to contain inflation, RBI is increasing the rates, fully aware that they are stifling growth, starving industry of investment they need. If one wants to see evidence of it, one can look at projected fiscal deficit of 4.6% to actual which is sure to exceed 5%. Choking growth is leading to lower tax revenues, thereby exacerbating the deficit (70% of GDP) and growing.

Congress has hijacked the nation and is building its vote bank by offering a social welfare state. Its a death spiral which may lead us to our next self inflicted crisis. Having withstood the global meltdown, we will be done in by our populist leaders.