The Greek Creditors are squeezing the country by forcing widespread changes to tax, pension, labour, financial sector and government run entities. Greece is in such as severe debt crisis that it has no other option but to agree to the creditors terms or be forced out of the Euro and undergo more pain. The fact that the government brought this crisis onto itself is leading to this current squeeze and the citizens have to undergo a long period of misery for the country to come out of its troubles.
The truth is that Greece’s issues are applicable to India as well. Tax to GDP ratio in India is one of the lowest in the world at around 10.5% of GDP, which has stayed stagnant over the last fifteen years. India does not seem to have the political will to broaden the tax base and this government must focus on this aspect if India has to move forward. India’s pension liabilities are only going to increase as the government’s bloated workforce retire in the coming years. Demographics are changing with more of the current labourforce entering retirement age. The government still runs a huge public sector that is inefficient, unproductive and contributes to a large part of the counry’s fiscal deficit.
Government run banks are facing huge NPA problems that require immediate attention. Credit growth is at two decade lows as banks are unwilling to lend to the economy. Labour laws in India require reforms especially for the public sector.
India has the luxury of a large domestic consumption driven economy but that cannot take it out of trouble if the country structually does not change for the better.
Greece Bailout Plan
After a lot of negotiations on the weekend Greece and its European creditors finally agreed on a set of conditions that need to be implemented in order for the former to be bailed out. Greece would be able to get bailout funds to tune of Euro 86 billion (USD 95 billion) if and only if the Greek Parliament passes the necessary law that makes it mandatory to follow the set conditions with astute strictness and discipline. What are the conditions that Greece would be required to follow? The Government is in dire need of funds to pay for the necessary expenditure in the economy and the more they prolong it the more the situation would become complex and tough to manage in the time to come. The imposed conditions are definitely strict and requires fiscal discipline but the more relevant question is whether this austerity would dig a deeper hole in the economy of Greece or would the economy recover from its current state to help reduce its debt and show consistent growth.
What are the main areas of economic reform stipulated by the deal? The areas covered are pertaining to taxation, pensions, the labour markets, banks and privatization.
The Value Added Tax (VAT) would have more areas under its coverage and that would broaden the tax base in the system. The Corporation tax would also be required to be increased according to the conditions in the stipulated deal. The question now arises is that when the economy is dealing with very low growth how the increase in the rate of taxation and broadening of the tax base would help in growing its GDP at a faster rate? Remember that faster growth in GDP would help in reduction of debt to GDP for Greece as the economy would be able to service and repay its debt in an efficient manner.
Rise in the rate of taxation and broadening of the tax base would definitely have an adverse effect on the demand for products and services in the Greek economy. An adverse effect on demand would reduce revenues and profitability for companies which leads to a reduction in the revenues from taxation for the Government. Reduction in the revenues and profits for companies would tend to put a curb on the wage hikes for their employees. This would also reduce the overall tax liability for individuals but if at all a situation comes in where the salaries are reduced by some extent the tax base and the tax liability would reduce further. Struggling GDP growth in this case would give rise to a declining GDP and then a recession.
When European creditors are putting conditions for fiscal discipline to be followed by Greece they have to make sure that demand is also propped up in some manner other than Government spending or a stimulus, as an increased tax burden would reduce the disposable incomes for individuals.
As far as the pension system is concerned the retirement age would gradually rise in the years to come so that the burden would be eventually reduced for the Government. Pension is a necessary part of the Government expenditure and any move that helps in curbing it further should definitely be positive for the given situation of Greece.
Greece would have to take necessary steps to regulate the financial sector which means taking tougher action on non-performing loans and strengthening banking governance and eliminating any possibility for political interference in this system. This is positive for the economy as regulations in the system would go a long way in making the entire banking system more efficient and effective from now onwards.
Liberalization in labour markets would be a welcome move for the Greek economy as it would lead to sustainable and inclusive growth in the time to come.
Privatization would help in improvement of quality of the products and services offered. Increase in competition would give rise to cheaper products and services offered by the companies.
Greece is accepting the terms and conditions of the stipulated deal as an exit from the Euro would have serious consequences from shortage of cash in banks and eventually their closure. The situation would be no less than a mess as a closure of banks can paralyse the entire economic structure of the country. Looks like they are not taking any chances at the moment even though the Tsipras led Syriza party was elected into power due to anti austerity campaigning.