IMF, India's fiscal deficits and the need to question the obvious

I just read a news report from Business Today (19-Sept-2014) that speaks of the IMF asking the RBI to raise interest rates.  The infatuation over fiscal deficits as being the most serious problem that Indian macroeconomic policy needs to address runs throughout the article.  But there were also some contradictions that I came across, reading between the lines.  Here are some statements from the article that I want to highlight:

"...IMF said the government needed to take more steps to reduce stubbornly high inflation and the large fiscal deficit."

"The IMF said removing supply bottlenecks would lead to more sustainable growth. It also called for increasing public spending on infrastructure to ease supply bottlenecks and support economic development."

"While lauding the new government's emphasis on fiscal consolidation, it said "the quality and durability of the consolidation remain a cause of concern.""

"The government proposes to bring down the fiscal deficit to 4.1 per cent of gross domestic product (GDP) in current year from 4.5 per cent last fiscal ... fiscal deficit has to be brought down to three per cent of the GDP by 2016-17."

On the one hand the IMF wants to cut the fiscal deficit while at the same time they want an increase in public spending on infrastructure.  When they say the quality of the deficit is important, what do they mean?  What are the items that the government should cut spending on?

Also, like MMT warns us, why this concern about fiscal deficit numbers like 4.1% and 3% of GDP?  Will achieving these numbers solve India's macroeconomic problems?

It's time for MMTers to question what is now being seen as obvious in India.



Follow this link to read the article in Business Today:

http://businesstoday.intoday.in/story/rbi-should-raise-policy-rates-to-cut-inflation-imf-g20-cairn/1/210504.html

My book entitled, "In Search of Stability:  Economics of Money, History of the Rupee" should be out soon.  As the title suggests, I have traced the history of the rupee from 1542 to 1971 and added an epilogue which extends the study up to present times,  All this is done from a positive economics standpoint.  The book, however, does not take a critical stand on the colonial regime by asking what would have happened if things had been different; say, for instance, if India would have been better off had we moved on to a gold standard instead of the gold exchange standard in the late 19th century.  Rather we explore what the gold exchange standard was and its implications of price and exchange rate stability for India.  With this understanding, students and economic historians could pose more critical questions for further study.  The book has been accepted for publication by Manohar Book Publishers, New Delhi, India.

After completing the book I was keen to further explore the more recent history of the rupee, specifically post-1971.  It is while to trying to find a suitable theoretical framework within which I could place my study that I came across Modern Money Theory or MMT.  Over the last few months I have gone through several books, blogs and videos by the main proponents of MMT.  It's not only fascinating but has opened up a whole new world for me.  I had studied Keynesian macroeoconomics during my M.A. at Bombay (now Mumbai) University but was then exposed to a completely different macroeconomics at Cornell while doing my Ph.D.; if I recollect rightly it was dynamic optimization (micro was supposedly static optimization).  Confused about what I was really learning from all those models, my interests shifted altogether to political economy.  Luckily for me I got back to teaching Macroeconomics 101 to management students in India and have been able to hold on to simple Keynesian theory.

My interest in the economic history of the rupee and Keynesian macroeconomics somehow comes together when I read through the literature on MMT.  As I mentioned, it has opened a new window for me to understand fiscal and monetary policies in India today.

I will share things that I come across from sources including newspapers, magazines and TV that I think are important and need a re-look.  I do not intend to make any theoretical contribution to MMT right now at least; those interested could Google "modern money theory" and easily find material from the masters. I think there is a dire need of MMT for India; this is where I hope to make some contribution.