On Fiscal Indiscipline

Finally, the cabinet has approved revival of a sinking ship that is Scooters India (SIL). The government would put Rs 200 crores to revive the company. That means a part of the hard earned money form disinvestment and spectrum sales would be invested in a dying company. 

It showed some seriousness in September to bring down fiscal deficit in. In February it forgot the responsibility! Since 2002-03 the SIL is making losses. Hence in March2009, it was declared sick.Why this inconsistent behavior of government? 

Further, it is believed that Air India is asking money form the government. Government biggies like Air India, BSNL, MTNL are running losses. Yet the government wants to infuse life to these companies by throwing public money. Why does government want to do it?

Why is government competing with private players to produce the (private) goods that the private sector can happily supply at a competitive price? Whose interests does it serve? Simply, it is bad economics combined with vote-bank politics. What is surprising is that Prime Minister Manmohan Singh is keen to revive this company. See my earlier posts (here here) on why we should not bail out Air India and why the government should stay away from telecom business.

It is worth asking what is the role of government, in today’s world? It should create a conducive atmosphere favorable to the private sector. A business friendly environment where private sector can grow hassle-free. That means the government should provide basic necessary infrastructure goods where it is under-supplied by the private sector. Furthre, government should also provide merit goods like welfare schemes since a major section of the population live below poverty line. In these cases if the government ruins on deficits (fiscal deficit) it is justified. The argument for deficit is justified when investment in such projects lead to rise in capacity addition and raises productivity.  See this excellent post by Rajan.

So, what message does it convey? It is not serious in bringing down fiscal deficit. Remember that RBI’s policy rates are conditional upon how serious is the government in correcting its fiscal disorder. Such half-hearted efforts at reducing fiscal deficit may provide a wrong signal to the RBI. Further, if agents (household) are rational then it would get reflected in higher inflationary expectations which is again, key to central bank’s policy moves.

Please somebody tell the government not to pursue such bad economic decisions. Should somebody remind the government that it better serves the people by providing an enabling atmosphere where private sector can grow.