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 $1.1 bn. Over time, exporters will increase as it will be very remunerative for them and balance out the trade deficit. This is similar in concept to trading carbon-credits.
I just love the first idea. The problem is who will create such a rule!! Definitely not the parliamentarians themselves. So, it will always remain a quirky idea, at best.
2 comments:
Solution 2 if at all implemented will solve trade deficit not fiscal deficit.
Solution 1 is interesting but fiscal deficit is a direct consequence of the finance ministry and planning commission's measure. Moreover for a certain macro economic policy to show its results takes more than 5 years ie more a single elected government's tenure. So it may happen that Pranab Mukherjee and Manmohan Singh may bring in effect a fiscal deficit reducing policy but the results will open up only during the next "NDA rule", who in return will claim credit. So in effect solution 1 cannot qualify as a feasible solution.
In India's case, the fiscal deficit is enlarged due to the balance of payments issue due to a huge trade deficit. We don't get enough dollars by trading to be able to buy crude oil from the international market. This has a large effect on the currency conversion ($/INR) and increases the fiscal deficit.
India does not need, in my opinion, drastic changes. We need more firm policymaking on the economic sphere. Right now there is no accountability of the parliamentarians to good ecnomic policy. The moment you hurt their self-interst by making them ineligible for re-elction, they will ensure that the fiscal deficit is maintained within the set limits.
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