not defined clearly the boundaries between the state, the private sector and the market, and as a result, the Indian state intervenes in too many places and tries to do too many things, and it doesn’t do them well! Chapter 3 on ‘Ends and Means, State and Markets’ provides an excellent exposition of the role of the state. It is nicely complemented by Chapter 11 on the ‘State of the State’, which describes why the state in India has become ineffective. Demands on the state have expanded, but the capacity of the state to deliver has shrunk. Like all economists, Joshi views macroeconomic stability as a precondition for the private sector and markets to deliver. He thinks we are doing reasonably well on this front, greatly helped by the collapse of oil prices, but also by broadly sensible policy. He approves of inflation targeting and the establishment of a Monetary Policy Committee. I agree with this view, though perhaps too much is being expected of the independence of monetary policy. Successful macro economic outcomes require effective coordination of monetary, fiscal and exchange rate policy, all of which have to work in tandem. We have still to develop the set of institutions that will achieve this result.
External stability, defined as the ability to finance a reasonable current account deficit through stable capital flows, is another key aspect of macro stability. We have done reasonably well in this area, thanks to low oil prices, but Joshi feels the exchange rate should not have been allowed to appreciate, in real terms, as much as it has. Since we have not adopted a completely free capital account, we should perhaps have done more to moderate these flows, or build up reserves, to prevent the rupee from appreciating. Greater clarity on how we propose to deal with future surges of capital inflows, and what instruments we can deploy to deal with them, will lend greater transparency to the exchange rate policy.
Fiscal stability is the third leg of macroeconomic stability, and there are some unresolved problems. Joshi agrees that the fiscal deficit reduction targets that have been laid down are reasonable, but the real fiscal challenge is not just the reduction in the deficit, but doing so along with “deep fiscal adjustment”, by which he means restructuring expenditure towards “social and environmental protection, social enablement and investment in physical infrastructure”. He welcomes the decision to review the Fiscal Responsibility and Budget Management (FRBM) Act, but he also calls for the establishment of an Independent Fiscal Council to provide