Thursday, February 2, 2017

Is Democracy Inimical to Prudent Government Budgeting: The U.S. and India Contrasted

At a time when the U.S. Government sported an accumulated debt of roughly $20 trillion, with continued deficits expected to add about $10 trillion more over the next ten years, the most populous democracy in the world, India, laid out a prudent budget proposal—one that had been “extremely well thought-out,” according to Deepak Parekh of the Housing Development Finance Corporation in India.[1]

On February 1, 2017, the government of Prime Minister Narendra Modi made public its budget proposal for the following year. Even as the proposed budget “would significantly increase spending on infrastructure, rural areas and antipoverty programs,” the government’s annual deficit would be reduced to 3.2 percent of GDP from 3.5 percent in the current fiscal year.[2] The budget “included tax cuts for lower income taxpayers and small business, even as it came close to sticking with the country’s target for reducing the budget deficit.”[3] In a democratic system, in which popular pressure is even in theory for increased government spending and lower taxes, increasing discretionary spending need not come at the expense of fiscal discipline. “The economy needs the spending to give consumption a boost, but the government is also giving weight to fiscal prudence,” said Dharmakirti Joshi, chief economist at Crisil, an Indian credit-rating agency.[4] The proposal even adds spending on infrastructure such as roads in rural areas—an investment favorable to attracting foreign direct investment as the stated aim is to increase “efficiency and access to markets while providing jobs.”[5]

Modi’s action against currency on which taxes are not paid in banning the largest currency notes in November, 2016 had led the I.M.F. to cut its predicted growth rate for India by one percentage point for 2017 to 6.6 percent, so Modi must have been facing popular pressure to spur economic growth by distending fiscal policy beyond what prudence would allow. Even as five states prepared to go to the polls beginning on February 4th, the prime minister prudently wanted to demonstrate “strength in advance of national elections in 2019.”[6] Put another way, the pressure to allow the projected deficits to increase as a percent of GDP must have been enormous, yet fiscal discipline prevailed and even allowed for targeted priorities that would take due account of the value of fiscal stimulus. 

Democracy can be strong, meaning self-disciplined, yet there is no guarantee. As Thomas Jefferson and John Adams agreed when they were exchanging letters in retirement, an educated and virtuous citizenry is essential to the continuance of a viable republic whose house is in order. A $20 trillion government debt is indicative that at least one house is not in order, and the case of India demonstrates that the problem is not democracy itself.

[1] Getta Anand, “Arun Jaitley, India’s Finance Chief, Aims to Spur Economy Hit by Cash Shortage,” The New York Times, February 1, 2017.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.