Wednesday, December 14, 2011

Dream: How to control India's fiscal deficit?

Warren Buffet had two wonderful ideas that he has espoused over the years for fixing the fiscal deficit for US. Here let me outline two solutions that will go a long in solving this in India. But these ideas can also be extended to make governance work in India.


Solution 1:
Make a rule which automatically disqualifies all the sitting parliamentarians for running in the subsequent general elections once a threshold fiscal deficit target is breached!!


Solution 2:
Issue export certificates to all exporters for the dollar equivalent of their exports. Imports will be allowed only against a valid "export certificate". Create a secondary market for trading these certificates like stocks or bonds. For example, say Infosys exports software services for $1 billion. They get certificates for that amount. Now, Indian Oil needs to import oil. They can buy those certificates from Infosys in the open market and use it for the import of oil upto $1 billion. What will happen in reality is that because there is a disparity between import and export, the prices of the certificates will be higher that face value. So, for $1 bn of import, Indian Oil may need to pay say $1.1 bn. Over time, exporters will increase as it will be very remunerative for them and balance out the trade deficit. This is similar in concept to trading carbon-credits.


I just love the first idea. The problem is who will create such a rule!! Definitely not the parliamentarians themselves. So, it will always remain a quirky idea, at best. 

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