July 15, 2021 Sujeev Shakya

Surplus of Deficit

The common string that binds all ´South Asian economies is the ever-menacing problem of fiscal deficit. The region´s finance ministers always have a difficult time presenting deficit budgets, for they can only offer short term corrective action which do not really tackle the structural correctives that are required.

The gap between revenue and expenditure is ever -widening and is a matter of grave concern for every South Asian country. While inflation plagues all of them, the high deficit has curbed the growth of the Gross Domestic Product (GDP). The remedial measure of privatising industries to generate revenues has only been partially successful, and high government borrowings have raised regional interest rates to one of the highest in the world.

In a scenario where political dominance over economic issues prevails and hunger for power results in populist moves such as providing subsidies and sanctioning profligate feel-good schemes, the burden on the state exchequer is immense.

The fiscal deficit in the region has hovered around five and six percent, bringing down the GDP growth to below four percent. India, which generates 80 percent of South Asia´s GDP, has been raising the price of petroleum products. The purpose, which could be considered ridiculous, was to bridge the fiscal deficit gap. However, the move is will have a cascading effect on prices of all commodities. Inflation that has been kept at single digits for the past, few years may rise, leading to the vicious circle of higher interest rates, lower economic activities, higher deficits resulting in higher borrowing.

The way out may be a long drawn policy on encouragement of economic activities. Foreign Direct Investment (FDI) inflows in infrastructure are a necessity coupled with a transparent business environment that induces public accountability. FDI investment in developing countries is expanding at 10 percent per year, but the figure rests at a low 3 percent for the South Asian economies. The challenge is to increase the FDI-to-GDP ratio in these regions. Unlike other trade blocs, where intra-regional trade bails out nations with problems, this safety valve is not available to the economies of our region. Here, intra-regional trade is under five percent of the region´s trade, requiring the economies to have more of a global vision.

Fiscal discipline can be brought in by rationalising expenditure and simplifying revenue collection, administration and procedures. The parallel economies created in the countries of South Asian have helped sustain trade activities in Dubai or Singapore. The curtailment of flight of capital aided by plugging of revenue leakage shall contribute to narrowing the gap. While reforms are underway in the region, the speed of integration shall determine the destiny of these nations.