ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Reliance on Supply-side Responses

Erroneous Understanding of Macroeconomic Challenges

The government chose not to adequately expand budgetary expenditure to stimulate aggregate demand due to an erroneous understanding of India’s macroeconomic challenges. It relies heavily on imagined fiscal gains from demonetisation and the introduction of the Goods and Services Tax regime. The Union Budget 2017–18 was a missed opportunity for the government and our economy.

Even for those sceptical about the government’s declared policy intentions—varying from cleaning the Ganga to doubling farmers’ incomes by 2022—the subdued and insubstantial Union Budget 2017–18 was a surprise. The circumstances in which the budget was presented were exceptional. In the midst of a slowdown in growth with signs of the onset of deflation,1 the government had chosen to withdraw and declare worthless more than 80% of the value of currency in circulation by demonetising “higher value” notes. But new notes to replace the ones withdrawn were slow in coming and had to be rationed, because the indefensible measure had been poorly designed and its implementation unplanned. The consequence, as should be expected, was the expropriation of purchasing power, even if for a few months. Demand shrank, production was disrupted and well before budget time the economy was mired in recession and deflation, as the sudden shrinking of demand for lack of cash aggravated the earlier slowdown and depressed prices.

If the budget is meant to be an exercise that takes the immediate macroeconomic situation into account and lays out the government’s spending decisions and their financing for the coming year, this was a perfect moment to expand spending, since growth was slow and inflation on the decline. A proactive fiscal policy was also necessary because it was a central government decision that shrank growth and inflicted much pain on the most vulnerable in the population, in pursuit of a completely misguided attempt to combat graft, black money, and counterfeiting through demonetisation. These are reasons why the government should have opted for fiscal expansion. There was also a political reason why it was expected that the government would announce an expansionary budget. Elections in crucial states, the results of which would make much of a difference to the political standing of the central government, warranted promises of expenditure increases. In fact, sections of the opposition feared that the Budget Speech had been brought forward by a month to be able to exploit this opportunity to influence voters. Being a democracy with periodic elections at central and state levels India should be subject to its own version of the political business cycle.

Dear reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here

Updated On : 7th Mar, 2017

Comments

(-) Hide

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.

Back to Top