DISCUSSION
A Comment on Rajaraman’s Response
Mihir Rakshit
Iam grateful to Indira Rajaraman for | financial institutions fare in the medium |
going through my paper on the THFC | run; (b) whether the deficit is fi nanced |
and responding to it at some length. | through dollar-denominated debt, dome- |
My rejoinder is as below and the num | stic borrowing or seignorage; (c) the pre |
bered points are as in the response: | vailing degree of slack in the economy; |
and (d) additional GDP generated over | |
(1&2) Fiscal Adjustment Programme | time due to enhanced lending by banks to |
and GDP Growth: With an initial excess | credit-constrained enterprises. |
capacity, extremely weak (domestic) pri | |
vate demand for investment and (non- | (6) Human Capital Formation: Is cutting |
agricultural) consumption goods and | down expenditure on education a potent |
the anaemic pace of recovery of advan | way of promoting efficiency of investment |
ced countries,1 the FAP and projected | in human resources? How is one to factor |
growth path over the fi ve-year period | this in while setting expenditure targets? |
have to be based on the short-term con- | Would treating expenses on public works |
sideration of avoiding the output gap and | projects as revenue expenditure be justifi |
the medium-term need of bridging the | able on the same ground? |
economy’s infra structural-cum-human re | |
sources shortfall. The pertinent point to | (8) Seignorage: The (quasi) fi scal costs |
note here is that even wasteful govern | of negative seignorage during the pre |
ment expenditure for closing the gap is | crisis period was minuscule compared |
welfare- and GDP-enhancing in view of | with the huge loss the economy suffered in |
the zero oppor tunity cost of resources | terms of the unrealised investment/con |
used (Rakshit 2005, 2011). See also com | sumption potential. With an output gap, |
ments under 8 below. | the least-cost/least-distortionary mode of |
financing enhanced government expen | |
(3) Crowding Out: By how much and in | diture is seignorage. At the non-accelerating |
which areas should public capital expend | inflation rate of unemployment (NAIRU), |
iture be scaled down on considerations of | however, the optimum seignorage de |
the currently prevailing incidence of cor | pends (proximately) on the growth rate |
ruption? The cost-benefit calculus used | and people’s demand for real balan ces |
by the THFC in this context while fi xing | (Rakshit 2005); capital inflows to the |
the expenditure targets is not clear. | extent they promote the (NAIRU) growth |
rate raise rather than lower the scope for | |
(4) Disinvestment: Financing government | seignorage. Holding forex reserves in |
capital expenditure of (say) Rs 1,000 crore | excess of what is required for smooth |
through disinvestment2 whose present value | ening the volatility of the exchange rate |
(of future earnings foregone), discounted | due to random shocks or speculative be |
at the government’s (not private inves | haviour, does not make economic sense: |
tors’) borrowing costs, exceeds Rs 1,000 | capital inflows are required primarily for |
crore is suboptimal and reduces the | augmenting investment when there is |
attractiveness of sovereign debt to ration | no output gap, not when resources are |
al investors (Rakshit 2005). | underutilised (Rakshit 2003). The opti |
mum policy package during the pre-crisis | |
(5) Financial Inclusion: Rational private | period would have consisted of enhanced |
investors would take into account the fact | government investment and redistri |
that the debt burden due to the defi cit | butive expenditure, fi nanced through |
spending depends crucially on (a) how the | seignorage; imposition of taxes on FIIs |
140 | march 26, 2011 |
along with curbs on external commercial borrowings; and coordination of expansionary fiscal and monetary policies (Rakshit 2003, 2009). The fact that the RBI took recourse to large scale sale of government securities even while there was a substantial output gap attests to the glaring failure of macroeconomic policy coordination.
(10) Macro-stabilisation: Volatility of private investment, especially in an increasingly open economy, has very little to do with fiscal consolidation whose main outcome is (or is expected to be) promotion of average/trend growth in the medium and long run, not ironing out business cycles. Hence the need for a two-pronged fiscal management programme, as elaborated in Rakshit (2005, 2011).
Mihir Rakshit (proj_monfi n@hotmail.com) currently heads the Monetary Research Project, ICRA, and is based in Kolkata.
Notes
1 Still accounting for the major part of world income. 2 Rather than market borrowing.
References
Rakshit, M (2003): “External Capital Flows and Foreign Exchange Reserves: Some Macroeconomic Implications and Policy Issues”, Money & Finance, Vol 2, Nos 13-14, April-September; reprinted in Mihir Rakshit (2009), Money and Finance in the Indian Economy (New Delhi: Oxford University Press).

available at
Life Book House
Shop No 7, Masjid Betul Mukarram Subji Mandi Road Bhopal 462 001 Madhya Pradesh Ph: 2740705
vol xlvi no 13
EPW
Comments
EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.