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from Expert Zone:

Managing India’s budget deficit

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The budget deficit has been a concern for India, but Finance Minister P. Chidambaram has assured that the government will not deviate from the target of 3 percent deficit in 2017. In the very first year, however, it has become almost obvious that the target will be missed.

Budget deficit is not the privilege of government alone as even corporates and households borrow like the government to fund deficits. However, they ensure that the money is used in a manner that it is repaid in time. With the government it is different -- it can borrow more in order to repay old loans and it can do so with impunity because banks are a captive market for the government securities. That results in mounting public debt which stood at 56.5 trillion rupees at the end of March 2013. Of this, 40 percent is held by banks.

When companies borrow they invest the money in assets which are productive and yield a return. Companies’ deficits generate growth and productive employment. Budget deficit of the government to the extent it funds productive expenditure is no different, but there are no assets against 60 percent of public debt. The money is spent on current uses and the government borrows without any consideration for repayment.

That creates two major problems. First, the huge borrowing by the government results in overcrowding of the market and consequently in increasing interest rates. The available finances get distributed in favour of the government to finance less productive expenditures and against private sector which could have invested in more productive assets. The budget deficit consequently suppresses growth.

from MacroScope:

Moments difficiles

Breaking news is S&P’s downgrade of France’s credit rating to AA from AA+ putting it two notches below Germany. Finance Minister Pierre Moscovici has rushed out to declare French debt is among the safest and most liquid in the euro zone, which is true.

What is also pretty unarguable is S&P’s assessment that France’s economic reform programme is falling short and the high unemployment is weakening support for further measures. There's also Francois Hollande's dismal poll ratings to throw into the mix.

from Lawrence Summers:

Beyond the budget impasse

This month Washington is consumed by the impasse over reopening the government and raising the debt limit. It seems likely that this episode, like the 1995-96 government shutdowns and the 2011 debt limit scare, will be remembered mainly by the people directly involved. But there is a chance future historians will see today’s crisis as the turning point where American democracy was shown to be dysfunctional -- an example to be avoided rather than emulated.

The tragedy is compounded by the fact that most of the substance being debated in the current crisis is only tangentially relevant to the major challenges and opportunities facing the United States. This is the case with respect to the endless discussions about the precise timing of continuing resolutions and debt limit extensions, or the proposals to change Congressional staff healthcare packages or cut a medical device tax that represents only about .015 percent of GDP.

from India Insight:

Deficit? What deficit? India makes a golden version of everything

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Indians use gold for all sorts of things. As the world's biggest gold consumer, its citizens use coins, bars and jewellery  as gifts, dowries and investments that are literally more solid than a share in a company. The ill effect that this has on India's current account deficit has led the government to try to curb demand.  Here are a few examples of demand that nobody can seem to curb.

This week, gold importer RiddiSiddhi Bullion's subsidiary Dia Jewels unveiled India’s first gold-plated motorbike. About 35 to 40 kilograms of silver went into making the miniature two-wheeler model, which is gold plated and studded with diamonds, and took six months to make, said Mukesh Kothari, director of Riddisiddhi Bullions.

from India Insight:

India’s love for gold and the government’s efforts to curb it – a timeline

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Google Trends shows that the term “current account deficit” is among top searches from India in 2013. Add “gold” as a comparative keyword and the searches for the commodity Indians love are far higher.

Indians buy gold for everything – investment, gifts, wedding ceremonies and auspicious days. But of late, this has become a pain for policymakers.

from MacroScope:

Is Congress the ‘enabler’ of a loose Fed?

We heard it more than once at today’s hearing of the Joint Economic Committee featuring Fed Chairman Ben Bernanke: the central bank’s low interest rate policies are allowing Congress to delay tough decisions on long-term spending.

As U.S. senator Dan Coats asked pointedly: “Is the Fed being an enabler for an addiction Congress can’t overcome?”

from Global Investing:

India’s deficit — not just about oil and gold

India's finance minister P Chidambaram can be forgiven for feeling cheerful. After all, prices for oil and gold, the two biggest constituents of his country's import bill, have tumbled sharply this week. If sustained, these developments might significantly ease India's current account deficit headache -- possibly to the tune of $20 billion a year.

Chidambaram said yesterday he expects the deficit to halve in a year or two from last year's 5 percent level. Markets are celebrating too -- the Indian rupee, stocks and bonds have all rallied this week.

from Global Investing:

Cheaper oil and gold: a game changer for India?

Someone's loss is someone's gain and as Russian and South African markets reel from the recent oil and gold price rout, investors are getting ready to move more cash into commodity importer India.

Stubbornly high inflation and a big current account deficit are India's twin headaches. Lower oil and gold prices will help with both. India’s headline inflation index is likely to head lower, potentially opening room for more interest rate cuts.  That in turn could reduce gold demand from Indians who have stepped up purchases of the yellow metal in recent years as a hedge against inflation.

from The Great Debate:

2014: The Democrats’ dilemma

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Washington has been fascinated by Republican self-laceration since the 2012 election. Karl Rove triggered a circular firing squad by vowing to take out unwashed challengers in GOP primaries. Louisiana Governor Bobby Jindal begged Republicans to stop being the “stupid party.” Strategists say the party can’t survive as stale, pale and male. Tea Party legislators knee-cap GOP congressional “leaders” and well-funded political PACs strafe any who dare deviate from the party’s unpopular gospel. Republicans are even talking about changing “Grand Old Party” to something more fashionable.

Representative Paul Ryan’s newest budget will put every Republican on record voting to turn Medicare into a voucher, gut Medicaid, repeal Obamacare, savage investment in education and leave some 50 million Americans without health insurance. Not surprisingly, polls suggest Congress is less popular than colonoscopies, and Republicans poll at lowest levels on record.

from Judgement Call:

The fiscal crisis nears – or not

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Few economists preach spending cuts as a cure for high unemployment. Yet that’s exactly what Congress decided when it imposed, starting March 1, across-the-board spending cuts (the “sequester”). Despite Friday’s mildly upbeat jobs numbers, the economy remains limp, with 15 million or so unemployed individuals who want to work. Federal spending cuts won’t make their plight any better.

Congress has known for quite some time that the federal budget will turn sour in 10 to 15 years, with expected outlays far outstripping expected revenue. For complicated, if not odd, reasons, Congress now feels compelled to do what it ordinarily shuns: cut federal programs and raise taxes. That might seem politically brave and responsible. But brushed up against facts, the case for Congress taking swift action wobbles, hitting wrong targets at the wrong time.

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