FM, Fiscal Policy, And The Indian Economy

India’s Finance Minister has given a series of interviews — Indian Express, Hindustan Times, Economic Times, Swarajya and the Business Standard.

I recommend, in particular, the interviews to the Indian Express, Economic Times and Swarajya, perhaps, in that order.

The questions posed by IE journalists/interviewers were incisive.

She did not flinch from answering them. She accepted the challenge and her answers on the politics of farm sector reforms were equally incisive. Well worth a read. She also has compelling arguments on the oft-repeated charges of intolerance and suppression of dissent.

Also, this point on the Emergency Liquidity Guarantee facility offered to small enterprises has been extended.

I did not know that:

The point she makes on the critics who have charged that all critics of the government and the PM are called anti-national, was feisty:

Her interview with the Economic Times stood out for the candid expression of ‘Dharam Sankat’ on the claim that the Enforcement Directorate has on some of the assets of Bhushan Steel that have been since acquired.

She understands the importance and sanctity of the Insolvency process and she is also mindful of the claims of ED. You can find the interview here.

The interview with Sukumar of the Hindustan Times mentions the national security implications of what is happening in Ladakh and that the influence it has on the fiscal policy decisions of the government should not be lost on anyone.

One particular exchange in the interview with Swarajya was interesting for the economics teacher in me:

"There is a feeling that most of the package is about easing lending norms, not putting money in people’s pockets. How will demand improve? When can we expect a more direct demand stimulus package?"

I found myself agreeing with her on that response. In the ‘National Income Identity’, we have Y=C+I+G+(X-M) where 'I' is investment spending and it is part of the aggregate demand function.

But, some forms of investment do boost potential growth and hence enhance aggregate supply.

Check out the two posts in economicshelp.org here and here.

On whether the government should be doing more on stimulating economic growth with additional fiscal spending, a friend shared this recent IE article that has appeared after their interview with the Finance Minister.

My view is that the government can do more and should do more. I have written about it here, here and here.

That said, I can also comfortably and, without fear of contradiction, concede the following:

(a) It is hard to figure how to and when. Easier to be wise in hindsight.
(b) It is hard to know if the positives would outweigh the negatives.
(c) I would concede that they have more information than we do on the security aspect.

With particular reference to (a) above, see the October 2020 NBER Digest. One of the papers (‘How Did US Consumers Use Their Stimulus Payments? (NBER Working Paper 27693‘) featured there examines how the stimulus cheques were spent or used by households in America thus:

Why didn’t Americans spend more? Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber put forward two possible explanations.

One is that the pandemic-induced lockdown closed down so many businesses and recreational and travel options that recipients could not spend the whole transfer.

The other is that the law of diminishing returns kicked in. They find that the larger the stimulus check, the less likely recipients are to spend it.

The researchers say this suggests that there is a bound on how much stimulus can be generated through direct transfers to households, and that in the face of large crises, decision-makers may want to consider a broad range of policies targeting aggregate demand, with direct transfers being only a part of the fiscal policy response. [Link]

So, it is one thing to recommend stimulus. Recommendations and suggestions without responsibility and accountability for consequences are far easier.

No one knows what works and in what horizon and how much and the downsides.

Similarly, with respect to asset sale. It is easier for us to say that the government should monetise its assets. All fine and dandy, in theory.

But, when to sell, what to sell, at what price to sell and to whom are all fraught with complexity and consequences, especially by the three Cs far longer after one’s retirement.

The recent case of a CBI court re-opening the case of a hotel privatised during the first NDA government by Dr. Shourie is a case in point.

In principle, I have made the case too for higher government spending, for monetisation, et cetera but I respect the constraints the government faces and the issues it has to take into consideration.

Back to the interviews of the Finance Minister. It is very good that she reached out to so many outlets and shared her views on a range of topics.

The conversations were candid and we got a glimpse of her thinking on many issues, from politics to economics to security to personal response to the crisis, the ‘steep learning curve’ as Swarajya’s R. Jagannathan put it.

At least for now, she has been rewarded for her efforts. The E-Way Bills generated in September 2020 provides the strongest indication:

We will take this one too, even though all the caveats are well-known and noted:

This is from the monthly Markit Manufacturing PMI surveys:

Little-known Sales Managers’ index (SMI) improved to 44.3 in September from 39.5 in July and 42.2 in August 2020. [Link]. Full details are not available except to subscribers and I am not one.

The monsoon was the third best in 30 years:

Whether they sustain or not — because there are plenty of global uncertainties both in politics and pandemics and in pandemics-politics — these are definitely greenshoots.

(This piece was originally published here and is reproduced after permission)