STA­BIL­ITY

India Today - - LEISURE -

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

Il­lus­tra­tion by TANMOY CHAKRABORTY

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