Editorial 1 : Churn in France
Introduction: French President Emmanuel Macron is nothing if not a gambler. It may be recalled that he stormed to power in 2017 by taking a huge risk: He set up a new party which he claimed belonged neither to the left nor the right and in so doing, hollowed out the traditional left and the right parties in France.
Unpopularity of Macron’s reforms
- The present political landscape in France, therefore, has virtually no space for moderation.
- Macron’s main reforms, like the ones on pensionable age, have been extremely unpopular.
- There was the mass protest of the yellow vests in 2018 which erupted because of Macron’s green tax on fuel.
- It was, therefore, not surprising that Macron lost his legislative majority in parliament in June 2022.
- Since then, he has struggled to get anything done in the fractious French parliament.
The challenge from far-right candidate
- Marine Le Pen has been carrying out a process of “de-demonisation” of her party (National Rally) and has made statesmanlike comments on burning issues of the day.
- Marine Le Pen no longer says France must get out of the EU; she hopes to work with other like-minded leaders like Giorgia Meloni of Italy.
- Le Pen, however, is expected to be tough on immigration and favour economic nationalism.
- She is opposed to globalisation and multiculturalism.
The new left in France has its own agenda
- The parties of the left have cobbled together a “new popular front” which will fight the legislative elections on promises like retirement at 60 years, increasing minimum wages, raising public sector wages, cutting income tax and introducing a wealth tax for the rich.
- Never mind that all this will be calamitous for France which already has a public debt to GDP ratio of 110 per cent.
The probable scenario after snap election
- While it is hard to predict precisely the elections on June 30 and July 7, a two-step process in France, some things may be said with reasonable certainty.
- It is hard to see Macron’s party get an absolute majority.
- While Macron will continue as President (these are legislative elections and not presidential) he will be forced to “co-habit” with a prime minister from a different party.
- That looks likely to be the young Jordan Bardella who has been designated by Marine Le Pen.
- She is eyeing Macron’s position in three years’ time when presidential elections are due.
- A hung parliament is also a possibility deepening the political uncertainty in France.
The significance of France in Europe and in the world
- France is the second most important economy in the EU and the only European country now which possesses nuclear deterrence and is a permanent member of the United Nations Security Council.
Ramifications of the results of snap election for Europe and beyond
The outcome of the snap poll called by President Macron could have the following geopolitical ramifications for Europe and beyond.
- If as expected, there is “co-habitation” between a Prime Minister belonging to the far-right (or far-left for that matter) and President Macron, then France will be too weak to drive EU’s foreign and security policy.
- If the far-right or the far-left wins, this may also bring France into direct confrontation with Brussels on EU membership obligations.
- It is well known that the Franco-German engine drives the EU. Indeed, the German Chancellor has already said that he hopes Le Pen’s party will not win in the elections. The Franco-German engine will sputter and may stop altogether.
- France’s commitment to the war in Ukraine may waver. Marine Le Pen has ruled out French troops in Ukraine and her priority will be funding her domestic agenda in France not military aid to Ukraine.
- The far-left parties have taken a pro-Palestinian position on the Gaza issue that has made the French Jews and Israel very worried.
- A France and consequently, an EU which is anti-immigration, economically more protectionist and inward-looking.
- The combination of a possible Trump in the White House and a geopolitically weak EU cannot but be welcomed by powers like China and Russia.
Conclusion: The French President is hoping that voters will go neither for the far left nor the far right. But things may not turn out as he hopes. If either of the sides wins, France will have a drastic change in its policies. Its impact will be felt in Europe and across world.
Editorial 2 : Big reforms push
Introduction: In most advanced economies, the annual budget is a non-event. In emerging markets, on the other hand, the budget presentation has special significance. In the case of India, the budget is a legacy inherited from colonial times to the extent that the timing of the presentation was also aligned with British time.
Why does the budget hold so much importance?
- The answer lies in its modified purpose.
- While the budget was primarily meant for accounting in the British empire, it has since Independence meant to lay out the administration’s vision for the economy.
- Budget announcements at the beginning of a government’s term are even more important.
- This is because economic agents, market participants, and citizens expect the announcement to lay out the vision of policymakers over the term of the government, typically five years.
What could be the vision of 2024-25 budget?
- The 2024-25 budget is expected to present a long-term vision for the Indian economy.
- It must entail five key elements: (i) growth (ii) employment (iii) manufacturing (iv) public finance and (v) others.
1. Growth
- Government aims to make India a developed economy by 2047.
- To achieve this, India’s per capita income needs to increase significantly.
- Current growth rate of 9.2% will make India an upper-middle-income country by 2030.
- To catch up with other developing countries like Brazil and Indonesia, India needs a higher growth rate.
- Achieving 10% real GDP growth might be necessary to close the gap quickly.
- High growth historically involved strong private consumption, investment, exports, and imports.
- The government budget can play a key role in boosting these aspects.
2. Employment and Manufacturing
- India needs to boost labor-intensive manufacturing to take advantage of its large workforce.
- This will require reforms in the factor market, which sets wages and prices of resources.
- The government has already begun reforms, but it’s a complex process.
- Solutions include streamlining land acquisition (e.g., digitalizing land records) and offering alternative compensation models.
- If India can address these challenges, it can become a viable alternative to China for manufacturers (“China + 1”).
3. Public Finance
- Fiscal policy decisions are often based on speculation and politics, leading to uncertainty.
- India’s FRBM review aimed to make fiscal policy more scientific by focusing on debt-to-GDP ratio.
- High debt servicing costs (over 40% of central government revenue) are a concern (which is way higher than the average of 10 per cent across emerging markets).
- Lowering debt is crucial for improving credit ratings.
- An independent Fiscal Council was recommended to provide forecasts and advise on fiscal policy.
- The idea was for the Council was to serve both an ex-ante role — providing independent forecasts on key macro variables like real and nominal GDP growth, tax buoyancy, commodity prices — as well as an ex-post monitoring role, and serve as the institution to advise on triggering the escape clause and specify a path of return.
- Reconsidering a Fiscal Council might be timely after the pandemic.
- Integrating market discipline (sovereign risk) into fiscal rules is important.
4. The reform in other sectors
- The fifth element is broad, but equally crucial — further development of agriculture markets, renewed emphasis on cleaning up of higher education, improving health outcomes, and meeting the carbon limits.
Conclusion: It’s time for a major reform push. The 2024-25 budget is a chance to signal this commitment. 10% real growth is achievable by continuing to invest in physical and digital infrastructure, while maintaining macroeconomic and political stability.