The common string that binds all ´South Asian economies is the ever-menacing problem of fiscal deficit. The region´s finance ministers always have a difficult time presenting deficit budgets, for they can only offer short term corrective action which do not really tackle the structural correctives that are required.
The gap between revenue and expenditure is ever -widening and is a matter of grave concern for every South Asian country. While inflation plagues all of them, the high deficit has curbed the growth of the Gross Domestic Product (GDP). The remedial measure of privatising industries to generate revenues has only been partially successful, and high government borrowings have raised regional interest rates to one of the highest in the world.
In a scenario where political dominance over economic issues prevails and hunger for power results in populist moves such as providing subsidies and sanctioning profligate feel-good schemes, the burden on the state exchequer is immense.
The fiscal deficit in the region has hovered around five and six percent, bringing down the GDP growth to below four percent. India, which generates 80 percent of South Asia´s GDP, has been raising the price of petroleum products. The purpose, which could be considered ridiculous, was to bridge the fiscal deficit gap. However, the move is will have a cascading effect on prices of all commodities. Inflation that has been kept at single digits for the past, few years may rise, leading to the vicious circle of higher interest rates, lower economic activities, higher deficits resulting in higher borrowing.