Indian Policy Makers Have A Lot To Learn From Decline In France’s Ratings

With a per capita income of around $45,000, France is one of the richest and most developed countries. A member of G-7 and the second-largest economy of the European Union (EU), it is famed for its vibrant culture, trendsetting couture, technological prowess and economic might. Of the last, one may add, till very recently. For credit ratings agency Fitch, citing rising fiscal policy and political risks, recently revised France’s outlook to ‘negative’ from ‘stable’. This did not come as a surprise to those familiar with the state of the French economy. In May, ratings agency S&P had downgraded its credit score for the first time since 2013, due to ‘improper management of public finance’.

S&P lowered its rating to ‘AA-’ from ‘AA.’ Last week, Fitch said, “This year’s projected fiscal slippage places France in a worse fiscal starting position. We now expect wider fiscal deficits, leading to a steep rise in government debt towards 118.5 per cent of GDP by 2028.” Compare this with India’s 56.8 per cent. The deteriorating situation can be attributed to the policies of President Emmanuel Macron, whom the Economist has called a “surreptitious socialist.” While he was able to present himself as a Centrist, thus not raising many suspicions among Rightists, he eventually “embraced big government”.

The French economy is characterized by excellence across sectors like aerospace, pharmaceuticals, automotive, luxury goods and agriculture. And, of course, tourism, which has contributed to its prosperity, thanks to the millions of foreign tourist arrivals. Its prosperity allowed it to craft a generous social welfare system-too generous actually-and now the policy makers are realizing the magnitude of the problem. Unemployment doles, for instance, are seen as an incentive not to work. The duration of benefits varies with age.

At any rate, these have strained the public exchequer. Worse, the workforce is highly unionized. This heightens political risks associated with any reforms related to the labour regime. Macron’s administration understands this quite well, as it has faced considerable resistance to its pension reforms. Protests and strikes paralyzed some sectors. One of the key areas for reform remains the pension system, accounting for a big chunk of government expenditure. This is because of an aging population and generous pension. Further, France should lay greater emphasis on improving labor market flexibility.

A lower unemployment rate, particularly among the youth, is predicated upon the removal of structural barriers to job creation, such as rigid laws and high payroll taxes. By making the labour market more dynamic, France can enhance productivity and boost economic growth, which in turn would trigger a virtuous circle and help to reduce the fiscal deficit. The wealth and status of France as one of the world’s most developed nations does not imply that it ignores norms of fiscal prudence. Indian politicians should learn a lesson from the current problems of France: if a nation rich can’t afford to augment government expenditure beyond a point, an emerging economy has much smaller elbow room to allow taxpayer-funded freebies and other populist schemes. They must realize that populism is a sin that the inexorable laws of economics will never forgive.