MOHAN GURUSWAMY | 31 MAY, 2020
The Small Stimulus-Fiscal Deficit Fetish
The only reason why the actual stimulus package is only Rs.63K crs, is the obsession with fiscal deficits.
This obsession is purveyed by right wing liberal economists such as Raghuram Rajan and his former student the hapless Krishnamurthy Subramaniam who is the present CEA. They are true representatives of the Washington Consensus and are more influenced by Chicago economics guru Milton Freedman than Lord Keynes.
That's why the CEA when asked about a big stimulus said: "There are no free lunches!". That's exactly what Milton Freedman said. But they quite happily ignore the biggest deficit financed economy in the world - the USA. Raghuram Rajan told Rahul Gandhi on his video conference that a stimulus of Rs.65K crs was what he had in mind. The Nobel Laureate Abhijit Bhattacharya, on the other hand suggested a minimum of Rs.10L crs, as did Arvind Subramaniam.
The government of India and its BJP and RSS megaphones keep harping on the reduction of fiscal deficit to 3.5% as its great achievement. This magic figure was ordained by the pin stripe suited suitcase warriors in the IMF and Wall Street. We have taken it as the gospel and have begun to think of the fiscal deficit as the mother of all evil. Now here is some truth for Modi, Sitharaman and the rest of the ignorant South and North Block shakha's:
What is 'Fiscal Deficit?'
A fiscal deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings. Deficit differs from debt, which is an accumulation of yearly deficits.
A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy.
The fastest growing economies in the world, and now its biggest - USA, China, Japan and most of western Europe - have the highest debt/GDP ratios. Japan's debt/GDP is over 253% before the latest stimulus of 20% of GDP. China's debt is now over 180% of its GDP. The USAs debt/GDP is close to 105%. India's debt/GDP ratio is by contrast a modest 62%.
Pump priming the economy by borrowing per se is not bad. It is not putting the debt to good use is bad. Nations prosper when they use debt for worthwhile capital expenditure with assured returns and social cost benefits. But we in India have borrowed to give away as subsidies and to hide the high cost of government.
To give an analogy, if a family has to make a choice of borrowing money to fund the children's education or to support the man's drinking habit. The rational and good choice is clear. The children's education will have a long term payback, while the booze gives instant gratification to the decisionmaker. But unfortunately our governments have always been making the wrong choices
I have always believed that a fiscal deficit is not the problem as much as wasting borrowed money is. If borrowed money is used productively and creates growth and prosperity, it must be welcomed. So what we want to hear from the government is not about fiscal deficit targets, but economic growth, value addition, employment and investment targets. Our governments have hopelessly been missing all these targets and have been obsessively focussed. It is an idiotic obsession.
But if the regime abhors a stimulus financed by deficit financing, in other words by getting the RBI printing presses go into overdrive, there are other options that can be exercised.
So what can Modi do now to get us out of this quagmire? As it is he is hamstrung with a weak economic management team with novices as the two key players, the Finance Minister and RBI governor. Even if he addresses this where will the money come from?
India has over $480 billion nesting abroad earning ridiculously low interest. Even if a tenth of this is monetized for injection into the national economy, it will mean more than Rs.3.2 lakh crores. At last count the RBI had about Rs.9.6 lakh crores as reserves. This is money to be used in a financial emergency. We are now in an emergency like we have never encountered or foresaw before. Even a third of this or about Rs.3.2 lakh crores is about five times the present plan.
There are other sources of funds also, but tapping these will entail political courage and sacrifices. Our cumulative government wages and pension bill amounts to about 11.4% of GDP. After exempting the military and paramilitary, which is mostly under active deployment, we can target 1% of GDP by just by cancelling annual leave and LTC, and rolling DA by the last two or three increases.
The government can also sequester a fixed percentage from bank deposits, say 5% of deposits between Rs.10-100 lakhs and 15-20% from bigger deposits for tax free interest bearing bonds in exchange. The ten big private companies alone have cash reserves of over Rs.10 lakh crores.
There is money in the trees, and all it needs is a good shake up to pick the fruits. The pain of the lockdown must not be borne by the poor alone. The government can easily target 5% of GDP or about Rs.10L crs for the recovery fund as an achievable goal. The fiscal deficit goals can wait.
This money can be used to immediately begin a Universal Basic Income scheme, by transferring a sum of Rs.5000 pm into the Jan Dhan accounts for the duration of the financial emergency; fund GST concessions; begin emergency rural reconstruction projects to generate millions of new jobs and get our core infrastructure sectors like steel, cement and transportation moving again.
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