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Showing posts with the label fiscal deficit

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Reading the Union Budget: A Primer

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  The Union Budget is without doubt, the most important document the government presents in the Parliament each year. The reasons are not too far to seek. It is the statement that expresses the government’s plan to spend on various activities as also the government’s measures to raise the revenues from the various sources to meet its expenditure. Therefore, an analysis of the budget is always going to be of critical import. The Finance Minister’s speech comprises two parts. The Part A of the speech focuses on expenditure as also on the policy intent of the government. It is in Part A that the government announces its economic policy for the year. The issues of privatization, nationalisation, expenditure on populist schemes, allocations for various social sector activities, industrial policy, disinvestment etc. all get highlighted in Part A. Part B is about the tax proposals. It has perhaps lost some attractiveness following the GST which meant that indirect taxes by and large come unde
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Fiscal Policy-A Note

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  The government without doubt plays a critical role in the economy. Given its volume and domineering presence, one cannot ignore the centrality of the government in giving direction to the macroeconomic plane. The role of course has been controversial and subject to many debates. There exists little consensus on the ideal nature of governmental role. While the classicalists believed the role of government in the economy to be minimal with focus on ensuring law and order, the Keynesians emphasised the centrality of the government intervention. While the classicalists favoured the supply creating its demand, it found its limitations in the Great Depression of 1929; John Keynes formulation was there was lack of demand and the government must step in to create the demand that became the foundation for macroeconomics and thus greater fiscal intervention. While the monetary school emphasised the role of money thus favouring a greater role of the Central Bank in framing the economic trajecto
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Is the Monetary Policy Dead?

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  The recent monetary policy announcement by the RBI governor was not surprising in terms of its actions. It has chosen to retain the key ratios as they are. Further, they have indicated the possibility of a continuing negative growth of the GDP in the remainder part of the financial year. The inflation is relatively higher in CPI terms but low in terms of WPI. Foreign direct investment continues to increase with India currently having the largest quantum of foreign exchange reserves in its history. It would however be pertinent to understand the dynamics of monetary policy at this stage.   Monetary policy as noted in earlier posts too, is rooted in stimulating demand and supply through changes in the price of money, the interest rates. Either the policy can point towards interest rate stability which implies continued changes in money supply. Alternatively, if the focus is on stable money supply, interest rates have to keep on changing to achieve the desired money supply target. I
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Union Budget 2020-21: Truth, Perception and Impressions

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Budget 2020-21 apparently has belied many expectations. Given the projected arc of the economy, anticipation abounded on the prospective display of economic fireworks infusing animal spirits in the economy. To a few experts, there was a 2/3 probability of few major reforms being announced.   The seemingly abrupt end of a marathon speech thanks to Nirmala Sitaraman retiring hurt, left many apparently wondering about the objective of the marathon. Given its inability to go in for radical structural reforms, perhaps, there was very little to discern rather than entering Guinness Book of Records   for the longest budget speech in history. She had all the opportunity in the world to go in for some massive announcements. There are no major elections on the anvil. The FDI is at record levels. Political omerta codes are undergoing creative destruction. There are signs of economics Schumpeterianism on the skyline. Global headwinds are causing turbulences in economic growth. There was no
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Recapitalization, Economy and Moral Hazard

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The budget of FY 2020-21 is on the anvil. Incontestably, the Indian economy is performing below par. Without doubt, the Modi government has its task cut out in energising the animal spirits. Despite some contraction, there continues to exist a current account deficit. By almost all accounts, fiscal deficit is likely to breach the target. The high level of NPAs coupled with prospective NPAs are making banks reluctant to lend. Firms are saddled with high debt and thus unable to generate fresh investment. The reluctance of the banks to lend until existing balance sheets are cleaned is aggravating the problem. To add to the woes, is low capacity utilization thanks to lower aggregate demand. The NBFC collapse compounds the misery on the consumer lending front.   Partially, the decline in automobile sales is on account of contraction in lending by non-banking institutions. In the backdrop, economists and industry experts have argued for the recapitalization plan for the banks, housing
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