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India’s Fiscal Deficit: Recent Trends and How to Tackle It

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Role of any government in the  economy is an essential  one where it takes decision on receipts and  expenditure. Total expenditure and total receipt are the two important features of budget yearly presented by government. Fiscal deficit actually refers to the excess of the spending over the revenues.[1] It  is calculated as a percentage of the  GDP.[2]  

Gross fiscal deficit or GFD is basically the excess of the total expenditure which includes the loans, net of recovery, over receipts of revenue (which includes external grants) and receipts of non-debt capital.[3] Net fiscal deficit is the GFD minus net lending.[4] 

Whenever fiscal balance is in positive then it is considered to be beneficial as revenue  is above  expenditure. Whereas, negative fiscal balance in fact means borrowings on which an economy depends on and is seldom bad.[5]   

Targets for fiscal deficit  are set annually  that  India fails to follow . We will see through this paper why is fiscal deficit happening , what impact it has on economy,  how  demonetisation and GST has impacted it and also how to use it to tackle the economic problems.  

Why Is Fiscal Deficithappening?

 Tax evasions by various organisations along with various other factors, leads to a loss in revenue for government that leads to fiscal deficit.

The Union budget, for 2019-20, estimated fiscal deficit to be 3.3% of GDP or Rs 7.03 lakh crores.[6] The overly-optimistic revenue estimations for 2019-20, was further worsened by the reduction in corporate income taxes (CIT), for which there were no expenditure or revenue offsetting steps been taken. This could result in the government breaching, by about 50 basis points, its fiscal deficit goal.[7]  Cutting CIT to the extent of Rs. 1.45 trillion, was mainly done to lift the weakening economy.[8]The fiscal impact would be felt much sooner than the decision’s growth impact.[9] 

The government ended August 2019, with a Rs 4.36 lakh crores revenue deficit.[10] As of mid-November, the Center mopped up just 6 lakh crores in direct taxes, that is about 50% less of the current direct tax revenue goal of 13.35 lakh crores.[11] This will lead to an increase in fiscal deficit. 

Comptroller and Auditor General or CAG stated that government’s key deficit numbers might be substantially higher than mentioned in the budget. CAG has therefore, asked whether or not extra-budgetary resources taken into account in budget reflect the true picture.[12] The CAG re-calculated, 2017-18 fiscal deficit to reveal that it is 5.85% actually. Government reported a 3.46% fiscal deficit that year.[13]  The fiscal numbers of the government over past few years are under heavy scrutiny as growth has been sluggish since year 2016’s third quarter.

Impact Of Fiscal Deficit On Economy

Fiscal deficit is similar to a vicious cycle. Fiscal deficit has dire consequences on the economy as the government borrowings is in fact one of the last resorts left with the government and that results in higher interest rates in the market.[14] 

Higher interest rates are resulted because markets are doubtful about repayment by the government;  due to which the government bears high interest rates, for this perceived risk that later puts the government into further debt, hence being a vicious pattern.   Higher the rates, lower is the scope of private investment that decreases resources that are available for the private sector investment. High government borrowings can have various potential hazards that are mentioned below.  

The Crowding Out Effect

The government to cover up for its deficit borrow more from the private sector in form of bonds. By selling the bonds it takes money from the private sector. When the private lenders lend money to the government, they actually lend it out, of their savings/ profits. The savings of the private sector gets reduced which lessens itsability to invest which ultimately crowds out the private investment, out of the market.[15]

Therefore, government spending increases and the private spending reduces. Since the government spending’s are considered less effective than private spending this is bad for the economy. The government during a fiscal deficit in fact does two things: increases borrowings or increases tax revenue.

INCREASES TAX REVENUE- Whenever the government increases tax, it does it by actually increasing corporate taxes, income taxes etc. which results in a reduction in disposable income of the firms, so this increase in the government spending does not really result in increase in the aggregate demand(AD).[16]

The increase in the government spending becomes offset by the decrease in the AD   that is due to decrease in the disposable income. When the private sector has lesser money, it even spends lesser in the private projects.

Inflation 

When the government sticks to not borrowing of money but actually ‘monetisation’, inflation occurs,[17] which increases the money supply in the market. Therefore, aggregate demand too increases causing inflation. Fiscal deficit can also imply an increment in the government spending’s which then increases AD that results in higher price levels of services and goods.

Higher Taxes 

Whenever the debt to GDP ratio amplifies, the government requires to increase the tax revenue which it does by increasing its tax rates.[18] 

Impact of demonetisation and goods and service tax(GST) on fiscal deficit

Demonetization changed our currency system providing the people an incentive to use and spend money in a much productive way than letting cash lying around. Cash lying around was deposited in the banks and eventually people started trusting digital payments. Banks also experienced a surge in liquidity. Banks then deposited this sum, through different windows such as SLR, to RBI. This resulted in an increase in the government treasury. The raids for the black money also led to an increase in revenue. This resulted in an increase in income taxpayers. Income taxpayers grew by 9.1 million. There had been an 80% rise, above the average annual increase, in taxpayers.[19] The rise was also reflected in the filing of IT returns and the payment of advance tax. While in the evaluation year 2016-17 the figure of taxpayers increased, in the next year the rate of growth fell to acquainted levels.

But demonetization affected India’s MSMEs badly. Micro-industry owners weren’t ready to cope with the lasting effects of demonetization. Therefore, a lot of micro-industry workers lost their jobs and also went back to their villages. These companies therefore had a low growth rate of 1%.[20]   

The primary goal demonetisation was tackling black money, at which it failed. Since the system has recovered 99.3% of the demonetized notes, it indicates that the activity didn’t bring enough “black money”.[21] This could be because just a tiny portion of tax evasion takes place in cash. 

It resulted in job cuts which led to higher unemployment rates.[22] Job losses led to lower productivity and the decrease in liquidity disrupted India’s cash-based economic structure, which devastated unorganized sector. Though, demonetisation led to higher tax revenue, the cumulative losses arising from the move left a scar on economy, which had an impact on GDP and fiscal deficit. Since demonetisation the GDP, has decreased to 5% (July-September 2019) from 8.8% (July-September 2016).[23] In FY20, fiscal deficit breached Rs 7lakh crores mark.[24]

By removing the cascading effect of multiple central and state taxes, GST has worked to increase profit and reduce costs of doing business. This could attract investment which would lead to an increase in GDP.  The increase in GDP would result in an increase in revenue for the government since taxes will increase. The GST is a type of tax that is consumption based and not anymore production based.

During the first 6 months, of the GST implementation, indirect taxpayers increased by 50%, partially due to several small businesses actively opting to be a part of the GST in attempt utilise input tax credits.[25] Even with a wider base, however, GST revenues were underwhelming.[26] Indirect tax collections of the Center in the post-GST era, rose by just 1.8% from the year earlier in April-September 2018, far slower than the growth of 5.6% seen in the full year of 2017-18 and even smaller than the growth of over 20 percent in the previous two years.[27] This is primarily because of decrease in economic activity, sluggish demand and compliance issues. 

Therefore, flawed GST implementation, coupled with demonetisation, served as the catalyst in India’s growth slowdown, which opened doors to fresh economic problems and affected the fiscal deficit.[28] 

Measures To Control Fiscal Deficit

There are two methods of restraining fiscal deficit. First, if the government decreases its expenditure, second, if it increases its revenue. There are again ways to achieve on both the ends.    

Reduce Expenditure 

SALE OR CLOSURE OF SICK UNITS  

India is a centre for the public sector undertakings(PSUs). Several of these PSUs are not making profits and demand more than giving. So, selling or closing the non-viable, sick industry would decrease the government spending on them.[29]

REDUCE SUBSIDY PAYMENTS

The subsidy bill is more than 10% of GDP, of which the non-merit subsidies add up to 5.7%.[30] Rationalization these could free up to 6% of fiscal space.[31]

REDUCE INTEREST PAYMENT  

India’s government is paying a lot of interest in previous years loans. Approximately one-fourth of the Indian spending of the budget went to interest payments.[32]   Therefore, government borrowings need to be reduced in order to decrease interest payments resulting in lower expenditure. 

Increase In Revenue   

PREVENT EVASION AND INCREASE TAX REVENUE 

Government needs to take measures to stop tax evasion and streamline the process of tax so that taxpayer base of the country widens which will lead to higher taxation. Agriculture could be included in the tax net, because distinguishing jobs cannot be the criterion for not paying tax, but rather it should be centered on high and low income.  In fact, people for evading taxes disguise their non-agricultural income as agricultural income.  

DISINVESTMENT 

Disinvestment is PSUs offers the government funding to cover the fiscal deficit and also has long-term advantages, as this money can be spent or invested in productiveuses that would generate jobs, increasing revenue and taxpayers.[33] The government has targeted mobilising 1.05 lakh crores by the means of disinvestment.[34]

ECONOMIC GROWTH

 Business promotion will help the economy to flourish. If the economy grows, the government tax revenue increases. It includes setting up a framework conducive to businesses and environmental improvement. 

Conclusion

India’s fiscal deficit, for many years, has been a concern. Although, fiscal deficit affects the economy in many ways like by increasing inflation, increasing interest rates, crowding out private investment, etc., it can be helpful when borrowings are done for productive uses, which can amplify government revenue. It can also be controlled by several measures when it is harmful for the country. The government, in recent years, has taken several reforms like introducing GST and demonetisation, the effects of these can be observed on the fiscal deficit.

A fiscal stimulus dose is needed to revive the growth rate of the economy. The stimulus size will be calculated by the constraints on debt servicing, borrowing capacity and Indian sovereign rating concerns. A downgrade will raise borrowing costs not only for government, but also for private sector; this could cause a freeze in the portfolio funds which track indices passively and has been flowing into India. In addition, such a freeze can strain the exchange rate of the rupee, which could drop abruptly. The possibility of a sudden cessation or reversal of foreign flows is serious, and our fiscal managers cannot neglect it. That is the price you pay for being not able to pay, in your own currency, for imports. It is undeniable that foreign inflows are required, at least in order to pay for capital goods and imported oil.

As India’s fiscal space is at a risk, it can also be assisted with easier monetary policy. Monetary policy must maintain a loosening or easing bias, given the economy’s cyclical weakness, at least till the predicted recovery takes hold.  

To be effective or successful in fiscal policy, it must be counter-cyclical, so a larger deficit in a year like a recession is all right. Every valuable additional fiscal rupee must result in a boost in consumption and growth immediately. The tax on capital gains ought not be abandoned, as stock market being at a high, as these are progressive direct taxes. Because Google, Apple, Microsoft, Amazon and Facebook, five of the world’s most successful entities, in India have a huge customer base, a digital tax should be imposed. The GST rate must be rationalized. This could give the fiscal buck, a greater turnout than a reduction in the individual income tax, which is borne only by about 3% of the population. This should be followed by a base expansion. The compensation formula provided to states for their failures in GST collections could be revised, as they too should bear some of the fiscal pain. 


[1]“Definition of ‘Fiscal Deficit” (December 2018) <https://economictimes.indiatimes.com/definition/Fiscal-Deficit>

[2]Will Kenton, “Fiscal Deficit” (August 2019) <https://www.investopedia.com/terms/f/fiscaldeficit.asp>

[3]“India’s Economy Dashboard” The economic times (February 1, 2019) <https://economictimes.indiatimes.com/news/economy/indias-economy-dashboard/what-is-economy-dashboard/slideshow/67755935.cms>

[4] Ibid 3.

[5]Sean Ross, “Understanding the Effects of Fiscal Deficits on an Economy” (August 2019) <https://www.investopedia.com/ask/answers/021015/what-effect-fiscal-deficit-economy.asp>

[6]Singh K, “August Fiscal Deficit at 78.7% Of 2019-20 Target ”The economic times (September 30, 2019) <https://economictimes.indiatimes.com/news/economy/indicators/august-fiscal-deficit-at-78-7-of-2019-20-target/articleshow/71377147.cms?from=mdr>

[7]Asit Kumar Misra, “IMF says India should avoid fiscal stimulus, opt for easing policy” (May 2019) <https://www.livemint.com/news/india/imf-says-no-to-fiscal-stimulus-okay-with-further-monetary-policy-easing-11577181218530.html>

[8]“Fiscal deficit hits 93% of budget estimate at ₹6.52 trillion till Sept-end” (October 2019) <https://www.livemint.com/news/india/fiscal-deficit-hits-93-of-budget-estimate-at-rs-6-52-trillion-till-sept-end-11572526967720.html>

[9]Asit Ranjan Misra, “Corporate tax cut may widen fiscal deficit by 40 bps: Fitch Ratings” (October 2019) <https://www.livemint.com/politics/policy/india-s-fiscal-deficit-may-shoot-up-to-3-7-in-fy20-fitch-ratings-1569489629214.html>

[10]Ibid 6.

[11] Nandi S, “More Steps to Revive Growth Soon: Finance Minister Nirmala Sitharaman” livemint (December 7, 2019) <https://www.livemint.com/news/india/more-steps-to-revive-growth-soon-finance-minister-nirmala-sitharaman-11575706380335.html >

[12]Narayanan D, “CAG Demonstrates How Govt Relies on off-Budget Resources to Fund Deficit” Economic times (July 25, 2019) <https://economictimes.indiatimes.com/news/economy/indicators/cag-demonstrates-how-govt-relies-on-off-budget-resources-to-fund-deficit/articleshow/70360281.cms> accessed December 26, 2019.

[13]Ibid 12.

[14]Reem Heakel , “Forces That Causes Changes in Interest Rates” (August 2019) <https://www.investopedia.com/insights/forces-behind-interest-rates/>

[15]Rajesh Kumar, “De-jargoned | Crowding out” (September 2012) <https://www.livemint.com/Money/x5B8XGNuQXqeZzZ6RU41jJ/Dejargoned–Crowding-out.html>

[16]Tenjvan Pettingar, “Crowding Out” (Economics Help,2017) <https://www.economicshelp.org/blog/1013/economics/crowding-out/>

[17]Chandavarkar, Anand G. “Monetization of Developing Economies (Monétisation Des Économies En Développement) (Monetización De Las Economías En Vías De Desarrollo).” Staff Papers (International Monetary Fund), vol. 24, no. 3, 1977, pp. 665–721. JSTOR, www.jstor.org/stable/3866500

[18]Julia Kagan , “Gdp Tax Ration” (July 2019) <https://www.investopedia.com/terms/t/tax-to-gdp-ratio.asp>   

[19]Ibid 18.

[20]Aishwarya Krishnan“Demonetization Anniversary: Decoding the Effects of Indian Currency Notes Ban” (May 2019) <https://economictimes.indiatimes.com/tdmc/your-money/demonetization-anniversary-decoding-the-effects-of-indian-currency-notes-ban/articleshow/61579118.cms?from=mdr>

[21]Ibid 20.

[22]Koustav Das, “Three years after demonetisation: Lot of sound and fury signifying nothing” (November 2019) <https://www.indiatoday.in/business/story/demonetisation-three-year-anniversary-economic-slump-gdp-unemployment-negative-growth-outlook-1617099-2019-11-08 >

[23]Ibid 42.

[24]Ibid 42.

[25] Kundu T, “How GST and Demonetisation Impacted Govt Finances” livemint (November 5, 2018) <https://www.livemint.com/Industry/pkS48kM47yZbxS49jL6MSN/How-GST-and-demonetisation-impacted-government-finances.html>

[26] “Dip in GST Collections Tells a Story” The hindu business line (October 3, 2019) <https://www.thehindubusinessline.com/opinion/quick-take/dip-in-gst-collections-tells-a-story/article29585185.ece>

[27]Ibid 20.

[28]Ibid 19.

[29]Devika Kher, “Divestment: More than just revenue” (May 2016) <https://www.livemint.com/Opinion/ZxVQBVNoq8UbqDwVhCMY6M/Divestment-More-than-just-revenue.html>

[30]Nikita Kwatra, “How government can fund a growth revival” ,(November 2019) <https://www.livemint.com/news/india/how-the-government-can-fund-a-growth-revival-11574237638358.html>

[31]Ibid 24.

[32]Krishnaand Tripathi, “Budget 2019: Do you know, a fourth of India’s Budget goes into interest payment?” (January 2019) <https://www.financialexpress.com/budget/budget-2019-do-you-know-a-fourth-of-indias-budget-goes-into-interest-payment/1454897/

[33]Smriti Jain, “Budget 2014: Five prescriptions for Narendra Modi to tackle fiscal deficit” (The Economic Times,2014) <https://economictimes.indiatimes.com/news/economy/policy/budget-2014-five-prescriptions-for-narendra-modi-to-tackle-fiscal-deficit/articleshow/37697902.cms>

[34]“Cabinet approves new strategic disinvestment process” , (October 2019)<//economictimes.indiatimes.com/articleshow/71445908.cms?from=mdr&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst,https://economictimes.indiatimes.com/news/economy/policy/cabinet-approves-new-strategic-disinvestment-process/articleshow/71445908.cms?from=mdr>

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Future Economy: Micro-Manufacturing & Micro-Exports

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Recovery now forces economies to emerge as dynamic entrepreneurial landscapes; today, the massively displaced working citizenry of the world may not return to old jobs, but with little help slowly shifting towards entrepreneurial startups as new frontiers to create economic independence and increased local grassroots prosperity. Today, the latest global influences of trendy entrepreneurialism optimizing available options like high quality “Micro-Manufacturing” and high value added “Micro-Exporting” now common discussions on the main streets of the world.  Although, this is not an easy task, but still very doable for so many and promises local uplifts. Smart nations are awakening to such bold notions and entrepreneurial driven agencies mandated to foster local economies are using virtual events to rise up with global rhythm and rich contents.

 Therefore, the blueprints and new models of today on upskilling SME exporters and reskilling for better-designed manufacturing, nation-by-nation and city-by-city are mobilization ready ideas to optimize abandoned talents. Nevertheless, such upskilling and reskilling of masses demands already skilled leadership of most of the gatekeepers of local economic development venues. 

Furthermore, global competitiveness has raised the bar and now only high quality value added goods and services traded for the wide-open world. The conveyer belts of technology and zoomerang culture of virtual connectivity flourishes platform economies. Missing are the advanced skills, complex problem solving and most importantly national mobilization of entrepreneurialism on digital platforms of upskilling to foster innovative excellence and exportability. SME and Startups must advance on global thinking, optimize access, and maximize image and quality superiority to reach the farthest markets with deeper pockets.

This is not an easy task. Methodical progressions needed. Study how Pentiana Project tabled advanced thinking on such trends during the last decade. Export Promotion Agencies, Chambers of Commerce, Trade Associations and most SME and midsize economic developments bodies all called for bold and open debates. For fast track results, follow the trail of silence and help thought leadership to engage in bold and open debates and give them guidance to overcome their fears of transformation.

Small enterprises must now open to new world of 200 nations and 10,000 cites

Micro-Exporters: Upskilling Startups to think like global exporters; the pandemic recoveries across the world coping with a billion displaced all have now critical needs of both upskilling and reskilling. Upskilling is the process of learning new skills to achieve new thinking. Reskilling is the process of learning new skills to achieve new performances. What is exporting, how to start at micro-levels and how to expand globally with technology are new challenges and promising options.

Micro-Manufacturers: Reskilling Startups to think like smart manufacturers; the real goals for startups to enlarge and base thinking on reskilling for “real value creation” becomes mandatory. How to start by thinking better, design quality with creative global age strategies and advance?  Advanced Manufacturing Clusters in various nations will greatly help, but understanding of global-age expansion of value offerings with fine production is a new art and commercialization to 200 nations a new science.

The future of economies, The arrival of Virtual leadership and Zoomerang culture is a gift from pandemic recovery, although at infancy, the sector will not only grow but also alter global commerce for good. Once successful the traditional advertising and marketing models dying, direct access live interaction is now far superior to mass-mailing and social media screaming.  The zoomerang impact of global thought leadership now forcing institutions to become armchair Keynote speakers and Panelists to deliberate wisdom from the comfort of their homes round the clock events has arrived.

The Difficult Questions: Nation-by-nation,when 50% of frontline teams need ‘upskilling’ often 50% of the back-up teams need ‘reskilling’ so how do you open discussions leading to workable and productive programs? Each stage challenges competency levels and each stage offers options to up-skill for better performances. Talent gaps need fast track closing and global-age skills need widening. New flat hierarchical models provide wide-open career paths and higher performance rewards in post pandemic recovery phases. When executed properly such exercises match new skills and talents with the right targeted challenges of the business models and market conditions. The ultimate objective of “extreme value creation” in any enterprise must eliminate the practices of ‘extreme value manipulations”.

First Three Steps:  In order to mobilize a startups revolution along with a small medium business economy, start by identifying 1000 to 10,000 high enterprises anxious to grow for national global markets. To quadruple exportability, select a small leadership team, from local trade Associations, Economic Development Bodies and Chambers of Commerce responsive to calls of upskilling and reskilling as critical steps. Suggest roundtable discussions to reach local, national or global audiences to spread the message. Explore such superior level debates to mobilize local businesses.  Most importantly, such mobilizations are not new funding dependent they are deployment hungry and execution starved. Futurism is workless, uplifting mental powers towards better value-added production of goods and services will save economies.  Optimize zoomerang culture and use virtual events to raise the bar on thought leadership. The world is moving fast and best to join the pace.

The rest is easy

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Portugal’s crisis management: “Economic patriotism” should not be tied to ideological beliefs

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The economic policy of the Hungarian government has provoked fierce criticism in the last decade, as it deviated from the neoliberal mainstream and followed a patriotic path, putting Hungarian interests in the foreground. While many link this style of political economy to the conservative position of the Orbán-government, in Portugal, a left-wing administration followed a similarly patriotic line to overcome the symptoms of the Eurozone crisis, showcasing that economic patriotism is not tied to ideologies, but is merely responsible thinking.

The catastrophic path of austerity

According to the theory of austerity, the government by implying austerity measures, “puts its finances in order”, hence the state does not become indebted and consequently investors’ confidence in the economy returns. However, if we think about what we really mean by austerity (tax increases, wage cuts, budget constraints, etc.), even the theory itself sounds counterproductive. Not surprisingly, this theoretical counter productivity has been demonstrated in practice in several cases.

One of the best examples is the case of Portugal, which along with Greece and other Southern-European nations was probably hit the hardest by the financial crunch. While all of the “GIPS” (Greece, Italy, Portugal, Spain) entered a steer recession, Portugal somehow managed to overcome it more successfully than its regional peers, but before that, it felt the bitter taste of neoliberal structural reforms.

Although the case of Portugal was not as traumatic as the ones of its Southern-European counterparts, in order to keep its debt under control, stabilize its banks and introduce “growth-friendly” reforms, Lisbon negotiated a € 78 billion bailout package in 2011, in exchange for a rigid austerity program aimed at the 2011-2014 period, orchestrated by the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB), the infamous “Troika”.

The neoliberal recipe did not differ much from that of Greece, and the then ruling Passos Coelho conservative government faithfully followed the structural reforms demanded by the “group of three”: working hours increased, number of bank holidays fell, holiday bonuses were abolished, wages and pensions have also been cut by 20 per cent, while public spending on health and education was drastically cut, and due to escalating privatizations, public assets have also been sold off quickly.

Despite the fact that by 2014 the country’s budget deficit as a share of the GDP had fallen to 4.5 per cent from the staggering11.2 per cent recorded in 2011 and the current account showed a surplus – as domestic demand fell apart, forcing companies to export –Portugal was still on the brink of social and economic collapse.

Public debt soared to more than 130 per cent of the GDP, tens of thousands of businesses went bankrupt, unemployment rose to 17 per cent and skyrocketed to 40 per cent amongst the youth. As a result, many talented Portuguese fled abroad, with an estimated 150,000 nationals emigrating in a single year.

The post-2015 turnaround

Things only began to change in 2015, when the Portuguese elected Anotnio Costa as Prime Minister, who was the mayor of Lisbon under the years of the crunch. Shortly after his election, Merkel encouraged the center-left politician to follow the neoliberal prescription proposed by the “Troika”, while her Finance Minister, Wolfgang Schäuble, underlined that Portugal would make a “serious mistake” if it decided not to follow the neoliberal doctrine and would eventually be forced to negotiate another rescue package.

Not being intimidated by such “threats”, Costa ditched austerity without hesitation, restored working hours, cut taxes and raised the minimum wage by 20 percent in the course of just two years. Obviously, his unpopular position made him crush with Brussels, as his government allowed the budget deficit to reach 4.4 per cent, compared to the agreed 2.7 per cent target. However, in May 2016, the Commission granted Costa another year to comply, and since then Portugal has consistently exceeded its deficit targets.

Tourism also largely assisted the post-15 recovery, to which the government placed great emphasis, so that in 2017 the number of visitors rose to a record high, reaching 12.7 million. Concurrently, Portugal has significantly improved the international reputation of its businesses and products, which contributed to increasing the country’s export revenues and attracting foreign investment.

Furthermore, Costa has raised social spending and at the same time planned to invest state revenues in transport, environmental infrastructure and energy, initiatives that could be extremely beneficial, as they would not only significantly improve the country’s sustainability, but also boost job creation, something that yet again indicates how important public investment is to an economy.

Additionally, Portugal has become an undervalued tech-hub, with plenty of start-ups offering good employment opportunities in addition to fostering innovation. The government with several initiatives, seeks to create a business-friendly ecosystem for them, under which they can thrive and boost the economy to the largest extent. It is thus not surprising, that Portugal has been the fastest growing country in Europe when it comes to the number of programmers.

Finally, one of the Costa’s top priorities, has been to lure back emigrated Portuguese who moved abroad during the crisis. To this end, tax cuts are offered to Portuguese citizens who choose to return home.

In a sum, since Costa stepped into office, Portugal has undergone a rapid recovery: economic growth has returned, unemployment has fallen radically, the public debt was also set on a downgrading path, while the budget remained well-balanced despite the increased spending, with Costa himself explaining that “sound public accounts are compatible with social cohesion”. Even Schäuble acknowledged Portugal’scrisis management, by actually calling Mário Centeno – the finance minister of the Costa government – the “Cristiano Ronaldo” of finance ministers.

Of course, not everything is bright and wonderful, as the country has emerged from a large crisis, the effects of which cannot be eliminated in just a few years. Public debt is still amongst the highest in the EU and several other challenges lie ahead for the South-European nation, especially by taking into consideration that the world economy just entered yet another crisis.

Furthermore, according to many, it was not Costa who led the recovery, but Portugal passively benefited from a strong recovery in Europe, falling oil prices, an explosion in tourism and a sharp drop in debt repayment costs. Indeed, it has to be taken into account that Portugal entered the recession in a relatively better position than many of its spatial counterparts and the relatively high quality of its domestic institutional infrastructure and policy-adaptation capacity aided the previous government to efficiently complete the memorandum of understanding (MoU) as early as 2015. Nevertheless, this is not a sufficient reason to discredit the post-2015 government’s efforts and justify the harsh austerity measures implied by the Troika. Taking into account that austerity never really provided decent results, it becomes evident that Costa’s policies were quite effective.

Economic patriotism should not be connected to ideologies

While in the case of Hungary and Poland “economic patriotism” has been fiercely criticized despite its prosperous results, this spite tendency has been an outcome of strong politicization in economic policy analysis. Even though the political context is verily important, it is also crucial to interpret economic policy independently, in order to take away valuable lessons and identify mistakes. Political bias is not a fortunate thing, as it is absolute and nullifies debate and hence development.

The case of Portugal is a perfect example, as it provides sound evidence, that a patriotic economic policy can be exercised by governments from all across the political spectrum and that the notion should not be connected to political and ideological beliefs. The left-wing Costa-government with its policy-making demonstrated that a solution always exists and that requires a brave, strong and decisive government, that pursues its own plan in the interests of the ‘patrie’, regardless of its positioning.

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The Question Of Prosperity

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Galloping economic woes, prejudice, injustice, poverty, low literacy rate, gender disparity and women rights, deteriorating health system, corruption, nepotism, terrorism, political instability, insecure property rights, looming energy crisis and various other similar hindrances constrain any state or country to be retrograded. Here questions arise that how do these obstacles take place? How do they affect the prosperity of any country? No history, geography, or culture spawns them. Simply the answer is institutions that a country possesses.

Institutions ramify into two types: inclusive and extractive. Inclusive political institutions make power broadly distributed in country or state and constrain its arbitrary exercise. Such political institutions also make it harder for others to usurp rights and undermine the cornerstone of inclusive institutions, which create inclusive economic institutions that feature secure property rights, an unbiased system of law, and a provision of public services that provide a level playing field in which people can exchange and contract; it also permits the entry of new businesses and allow people to choose their career. On the contrary, extractive political institutions accord clout in hands of few narrow elite and they have few constrains to exert their clout and engineer extractive economic institutions that can specifically benefit few people of the ruling elite or few people in the country.

Inclusive institutions are proportional to the prosperity and social and economic development. Multifarious countries in the world are great examples of this. Taking North and South Korea; both countries garnered their sovereignty in same year 1945, but they adopted different ways to govern the countries. North Korea under the stewardship of Kim Il-sung established dictatorship by 1947, and rolled out a rigid form of centrally planned economy as part of the so-called Juche system; private property was outlawed, markets were banned, and freedoms were curtailed not only in marketplace but also in every sphere of North Korea’s lives- besides those who used to be part of the very small ruling elite around Kim Il-sung and later his son and his successor Kim Jong-Il. Contrariwise, South Korea was led and its preliminary politico-economic institutions were orchestrated by the Harvard and Princeton-educated. Staunchly anticommunist Rhee and his successor General Park Chung-Hee secured their places in history as authoritarian presidents, but both governed a market economy where private property was recognised. After 1961, Park effectively taken measures that caused the state behind rapid economic growth; he established inclusive institutions which encouraged investment and trade. South Korean politicians prioritised to invest in most crucial segment of advancement that is education. South Korean companies were quick to take advantage of educated population; the policies encouraged investment and industrialisation, exports and the transfer of technology. South Korea quickly became a “Miracle Economy” and one of the most rapidly growing nations of the world. Just in fifty years there was conspicuous distinction between both countries not because of their culture, geography, or history but only due to institutions both countries had adopted.

Moreover, another model to gauge role of institutions in prosperity is comparison of Nogales of US and Mexico. US Nogales earn handsome annual income; they are highly educated; they possess up to the mark health system with high life expectancy by global standards; they are facilitated with better infrastructure, low crime rate, privilege to vote and safety of life. By contrast, the Mexican Nogales earn one-third of annual income of US Nogales; they have low literacy rate, high rate of infant mortality; they have roads in bad condition, law and order in worse condition, high crime rate and corruption. Here also the institutions formed by the Nogales of both countries are main reason for the differences in economic prosperity on the two sides of the border.

Similarly, Pakistan tackles with issues of institutions. Mostly, pro-colonial countries are predominantly inheritors of unco extractive politico-economic institutions, and colonialism is perhaps germane to Pakistan’s tailoring of institutions. Regretfully, Pakistan is inherited with colossally extractive institutions at birth. The new elite, comprising civilian-military complex and handful aristocrats, has managed to prolong colonial-era institutional legacy, which has led Pakistan to political instability, consequently, political instability begot inadequacy of incentives which are proportional to retro gradation of the country.

Additionally, a recent research of Economic Freedom of the World (WEF) by Fraser Institute depicts that the countries with inclusive institutions and most economic freedom are more developed and prosperous than the least economic free countries; countries were divided into four groups. Comparing most free quartile and least free quartile of the countries, the research portrayed that most free quartile earns even nine times more than least free quartile; most free quartile has two times more political and civil rights than least free quartile; most free quartile owes three times less gender disparity than least free quartile; life expectancy tops at 79. 40 years in most free quartile, whereas number stands at 65.20 in least free quartile. To conclude this, the economic freedom is sine quo non for any country to be prosperous, and economic freedom comes from inclusive institutions. Unfortunately, Pakistan has managed to get place in least free quartile.

In a nutshell, the institutions play pivotal role in prosperity and advancement, and are game changer for any country. Thereby, our current government should focus on institutions rather than other issues, so that Pakistan can shine among the world’s better economies. For accomplishing this highly necessary task government should take conducive measures right now.

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