In view of the recent Euro-zone crisis, it has time and again been stressed that the fundamental problem of Euro-zone is less of economic than political one. The Euro-zone collectively has 3.2% of budget deficit compared to 8.1% of the US.
However, within nation states of the Euro-zone, the picture is different as within states of the US or, for that matter, of my nation, India. 10-year yield to Spanish bonds has surpassed 7% whereas for Germany, it remains less than 1.5% and for US, it is little more than 1.5%, whereas in India, it was above 8.4%. What’s to be noted here is, for India, it has been consistently high whereas for Spain, it is an aberration.
Indian Prime Minister, Dr. Manmohan Singh, in the ongoing G-20 summit has announced that India will contribute $10 billion to the IMF to shore up IMF’s kitty to ensure Europe is not fund-starved. It already has a war-chest of more than $440 billion or so.
In my humble opinion, this is absolutely bizarre, keeping in mind the overall fiscal deficit of center and states in India (around 10%, out of which center alone is 5.9%); probably highest rate of poverty in the world with a billion-plus population, Â higher than Sub-Saharan levels of malnutrition of women and child, child mortality, etc. This is nothing but a race to the bottom where the poor ventures out to save the rich.
Surprisingly, the US, with the largest voting power in the IMF, has not pledged anything for Europe separately. The reasons may be two-fold, one it may be suicidal for President Obama to help equally rich Europe when domestic economic challenges are high, and 2nd may be from the realization that Europe has enough internal resources at its own disposal to deal with the problem.
Yes, the whole world agrees that Europe has the resources. What it does not have the will to save one (Greece or Spain) at the cost of other (Germany), when people in Germany, and particularly Angela Merkel believe that the root cause is to be more competitive globally, and not easing of monetary policies.
Had the US thought that Europe would lead to Lehman-like situation to affect American-growth in an election year, it could have opened its Federal vault for Europe. By not doing so, the signal the US is sending: Europe would not lead to Lehman-like situation in US.
Economic integration is not possible without political integration. In my opinion, much of the global economic challenges are because of nation-states globally are economically integrated, but not politically so.
The analogy of the United States of Europe in this context is well understood. Illinois, California or many of the US states with poor financial conditions do not present a threat to the global economy as Spain or Greece does, because they all are eventually part of the US.
At the same time, the gesture of Indian PM in G-20 over $10 billion pledge to IMF brings the situations in few Indian states to global limelight. Unlike China, where the Eastern Provinces are economically developed, in India, the Western and Southern Provinces are economically developed. India’s Federal Structure ensures Â Federal Government allocates state resources based on their abilities to raise funds, and a formula evolved over years, known asÂ Gadgil Formula in 2000. It takes into account population, per capita income, fiscal management, special problems, and performance of states; with population having more than 50% weigh.
Surprisingly, for the year 2012-13, West Bengal Â with population of Â 91 million received a plan outlay of around $5 billion whereas Gujarat with a population of 61 million got a plan outlay of around $10 billion. One needs to keep in mind that Greece has already received a bail-out package of $140 billion from the Troika of ECB, IMF and the European Commission, and population of Greece is 11 million.
In a way, what is Germany and Spain (or Greece) is to Euro-zone, Gujarat and West Bengal (or Bihar and UP) is to India. The fundamental problem of Euro-zone is the inability of different states to raise funds at uniform costs due to their historical strengths. In India too, a similar policy is leading to economically weaker states becoming further weaker, and then demanding bail-outs at some point of time. Â In spite of having nearly 40% more population than Gujarat, WB gets nearly half of Gujarat’s plan outlay, when WB needs money more than Gujarat. One is a question of performance and how to improve, the other deals with vicious cycle from where there apparently is no economic return.
Global media often may not understand what a billion dollar means for people of India when they discuss hundreds of billions of dollars for Europe or the US.
India has pledged $10 billion for Europe, whereas 91 million people in West Bengal saw their Chief Minister did resort to every drama for a bail-out deal for the state other than probably standing with a begging bowl before the Planning Commission. The finances of the state is, as per any standard, is much worse than Greece or Spain. The living standards of millions of Indians are much worse than those of Europe.
One is prompted to ask IndianÂ Government,Â on the existence of the United States of India, to bail-out its own states with weaker financials on the verge of bankruptcy before offering same to resource-rich Europe or IMF. Combined population of Bihar, UP and WB – the three large states asking for bail-out from the center, would be significantly higher than that of all of Europe.
One may state that this G-20 solidarity is to ensure India’s global image stands improved, and in the worse case, if India’s $10 billion can prevent Euro-break up, India is likely to receive better economic return.
Sorry folks…I don’t buy above argument.
It all brings to the key point on what all Government is empowered to do, in terms of policy-areas. It gives up scare resources – from spectrum to coal to land arbitrarily to a class of crony capitalists free of cost or at much subsidized rates, it pledges money to Europe when states in India like Bihar, UP, WB to virtually almost all the states ask for more assistance from the center.
Manmohan Singh may have followed an old adage on Indian hospitality by pledging $10 billion to IMF on account of Europe when millions of Indian starve in India. I could have agreed with him more had he himself lived like those millions of Indian poor before pledging this money to IMF.
Charity, as they say Dr. Singh, must begin at home. As a Prime Minister of the nation, our PM seems to be less answerable to its poor citizens who do not understand complex global economy, and more answerable to the G-20 group of nations. Going by how global leaders from China to US to Germany behave, they all, at all costs, protect their citizens interests. That’s what their job is. That’s why they are paid.
Unfortunately, Indian Prime Minister and Government follows an altogether different performance measurement system for itself. My humble request to IMF would be to politely thank Dr. Manmohan Singh, and return this $10 billion where it is needed more.
Prof. Ranjit Goswami works as theÂ Director of School of Management of RK University. Opinion expressed in this article is personal. HeÂ invites you to visit his blog,Â Wondering ManÂ (or take a look at his book,Â Wondering Man, Money & Go(l)d). You are also invited to join him onÂ Twitter