Why the government needs to loosen its purse strings

d474 rpr Economics, National and International, News Why the government needs to loosen its purse strings

Economics National and International News

Why the government needs to loosen its purse strings

Posted By d474rpr

Economists would almost all agree that fiscal discipline is a good thing. No government should aspire to live beyond its means. If this is the case, the consequences can be serious: rising inflation, rising interest rates, low private investment and declining growth. The current government of India has been commended for its budgetary restrictions. It reduced the overall budget deficit and shifted spending towards unnecessary programs such as fuel subsidies and more productive investment in infrastructure. What he has not done, however, is delivering the sustained strong growth of more than 8% that India needs. To do this, you may need to loosen the strings in the bag.

It is important to remember why the Indian economy is in trouble. Some analysts argue that the slowdown is a recent phenomenon, triggered by the government’s decision last year to withdraw 86% of circulation notes and the introduction last summer of a national goods and services tax. However, while both measures may have disrupted growth in recent quarters, the economy is expected to return to growth of 6.5% after adjustment. Achieving 8% will be more difficult due to deeper and longer factors. A statistic largely explains the downward trend of the maximum growth rate of 9% between 2003 and 2012. The ratio of private investment to gross domestic product was about 38% in 2006-7, period.

Ten years later, the proportion dropped to 28%. Almost all of the fall came before the current government took office. Despite a stable macroeconomic environment characterized by low deficits and low inflation, it has not recovered since. It is sometimes said that Karl Marx understood capitalism better than he understands communism. Marx knew that capitalism moves in boom and bust cycles, or boom and recession. India is experiencing a downward cycle characterized by a decline in private investment and a slowdown in exports (two key drivers of growth) over several years. The epidemic began around the end of the government’s mandate when growth collapsed in a context of scandal and political paralysis.

Companies that had reached the high level of rapid growth suddenly found themselves over-indebted, struggling for profits (or deep losses) and short-lived opportunities. A strongly weakened global economy, hit by the 2008 crisis and the problems of the so-called PIIGS economies (Portugal, Italy, Ireland, Greece and Spain), hammered exports. The fact is that India’s economy must go through a business cycle and even de-lever people and scale down, adapting to the new reality. The issue for the current government is the best way to alleviate the pain of this process. Marx’s solutions were a disaster. But a later economist, John Maynard Keynes, found a better way to manage and moderate short-term cycles by using countercyclical monetary and fiscal policies.

The Reserve Bank of India, which believes that inflation (at its most benign moment in many years) is a greater threat than slow growth, has not helped much in monetary terms. The bank resisted the rate cuts despite signs of a prolonged slowdown. Rather than regret this fact, the government should use the only other available tool: fiscal policy. If fiscal restraint has not revived private investment, perhaps spending more will contribute to “accumulating” this investment. Rapid growth could help alleviate the problems of stressed assets and struggling firms, which is the only way to encourage them to invest more.

One of the reasons why this is easier said than done is that governments do not always respect the countercyclical principle when there is a boom or a boom. When growth is healthy, the government must be diligent in maintaining its fiscal policies in balance or in surplus, rather than in deficit. This leaves the cushion for the inevitable descent. Unfortunately, the previous government spent heavily on wasteful systems precisely as the growth cycle increased. The central bank is not innocent either. The RBI has often been behind the curve by raising interest rates when a boom comes in, resulting in excess during a recession. The evidence of a good policy maker is to obtain appropriate countercyclical policies.

Written by d474rpr

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