fiscal policy

Error message

Deprecated function: The each() function is deprecated. This message will be suppressed on further calls in _menu_load_objects() (line 579 of /var/www/drupal-7.x/includes/menu.inc).

Reblog – No, MMT Didn’t Wreck Sri Lanka

Published by Anonymous (not verified) on Sun, 15/05/2022 - 8:37pm in

Debunking Bloomberg with Fadhel Kaboub

Written by Stephanie Kelton

Originally published on Stephanie Kelton’s “The Lens” on 29th April 2022.

Two poor men sitting on a trolley on a street of closed shops. Petta, Colombo, Sri LankaImage by Harshabad on Pixabay

Last week, Bloomberg touted an opinion piece (written by one of its regular columnists) claiming that “Sri Lanka was the first country in the world to try MMT” and that “the experiment has brought the country to ruin.” A few days later, The Washington Post republished the article. So it garnered a fair bit of attention. Unfortunately, the essay offers little insight into what’s really gone wrong in Sri Lanka. But, hey, editors and writers have discovered that MMT drives clicks, so there’s no dearth of efforts to shoehorn MMT into almost anything.

A number of people sent me the link and asked me to respond. I sat down to do just that, but then I remembered that MMT economist Fadhel Kaboub talks about Sri Lanka in some of his presentations and that he’s been studying the country for years.

Fadhel is an Associate Professor of Economics at Denison University and President of the Global Institute for Sustainable Prosperity. He brings deeper knowledge of the Sri Lankan economy and the policy decisions that have paved the way for their current predicament. So I reached out to invite him to respond to Mihir Sharma’s main claims about the so-called MMT experiment in Sri Lanka.

Sharma’s big claim is that “two cherished heterodox theories…became official policy in Sri Lanka and, within two years, they brought the country to the brink of default and ruin.” The government has halted payments of its foreign debt and warned that it may default. Import prices are surging. It’s hard for people to buy food and fuel. There are periodic blackouts and rationing. Inflation is close to 19 per cent and the central bank has recently doubled interest rates. Sharma acknowledges that there are ’structural factors’ at play, and he concedes that the pandemic hammered the nation’s tourism sector while the Russian invasion of Ukraine made everything worse. But he argues that “the deeper problem” is that the ruling elite “turned Sri Lanka’s policymaking over to cranks.” One of the heterodox theories that is supposedly responsible for the crisis is MMT.[1] What follows is a lightly-edited transcript of my Q&A with Professor Kaboub.

KELTON: Sharma claims that “Sri Lanka is the first country in the world to reference MMT officially as a justification for money printing.” He blames former central bank governor, Weligamage Don Lakshman, for listening to monetary cranks who convinced him that “nobody needs to worry about debt sustainability” as long as you “increase the proportion of domestic debt [relative to debt denominated in foreign currency].” Is there anything in MMT that says that as long as you “increase the proportion of domestic debt” you can “print money” without worrying about debt sustainability or inflation?

KABOUB: When I first read the statement of Sri Lanka’s Central Bank governor, Mr Weligamage Don Lakshman, back in 2020, it was very clear to me that he does not understand the basic MMT insights. He was under the impression that what matters in terms of monetary sovereignty is the proportion of foreign currency debt relative to domestic currency debt and that there was no need to rethink the foundation of the economic development model that his country has used since the late 1970s. Governor Lakshman focused on the proportion of debt but never questioned what the external debt was fueling, and never articulated how a higher proportion of domestic debt was going to build economic resilience in Sri Lanka.

MMT economists have been very clear all along that a country’s fiscal spending capacity is constrained by the risk of inflation, which is determined by the level of productive capacity (availability of real resources, productivity, skills, logistics, supply chains, etc.) and the level of abusive market power enjoyed by key players in the economy (cartels, exclusive import license holders, shell companies, cross-border traffickers, speculators, corrupt government procurement systems, etc.). Therefore, increasing a country’s fiscal policy space must be done via strategic investments to boost productive capacity and regulation of abusive market power. Sri Lanka’s economic policy choices (pre-pandemic and Russia-Ukraine war) do not even come close to what MMT economists would have suggested.

As I will explain below, Sri Lanka has three structural economic weaknesses that were systematically reinforced via mainstream economic policies: 1.) lack of food sovereignty, 2.) lack of energy sovereignty, and 3.) low value-added exports. These deficiencies imply that accelerating the country’s economic engines leads to more pressure on its external balance, a weaker exchange rate, higher inflationary pressures (especially food/fuel/medicine and basic necessities), and, as a result, it leads to the classic trap of external debt.

Here is how it all started. Sri Lanka, like many countries in the Global South, began the liberalization of its economy in 1977, and adopted a classic IMF-style economic development model based on exports, foreign direct investment (FDI), tourism, and remittances. This development model remained tamed during the civil war (1983-2009), but it was fully unleashed in 2009, and that is when external debt began to skyrocket, going from $16 billion in 2008 to nearly $56 billion in 2019. The value of the Sri Lankan rupee dropped from 114 to 178 LCU/USD. Thanks to a massive increase in government subsidies and transfers reaching more than 30 per cent of government spending in recent years, Sri Lanka struggled to keep inflation below 5 per cent. Yet, economists celebrated Sri Lanka’s great achievements with an average growth rate exceeding 5 per cent in the decade after the civil war, and a real per capita GDP growth putting the country officially in the upper-middle-income economy category. Sri Lanka was following the mainstream economic development model like a good student. In the decade starting in 2009, exports grew from $9.3 to $19.1 billion, tourism quintupled from 0.5 to 2.5 million visitors annually, FDI inflows quadrupled by 2018 to a record $1.6 billion, and remittances doubled to nearly $7 billion annually. These are the four engines of Sri Lanka’s economic growth, but they are also the engines driving the country deeper into the structural traps of food and energy dependency, and specialization in low value-added exports.

Here is how these engines constitute a trap. An increase in tourism induces more food and energy imports. An increase in remittances means more brain drain. An increase in low value-added exports induces more imports of capital, intermediate goods, fuel etc.; and an increase in low value-added FDI does the same plus the repatriation of profits out of Sri Lanka. On a global scale, these neocolonial economic traps have suctioned $152 trillion from the Global South since 1960.

KELTON: Sharma argues that it was the “printing of money” that caused inflation to hit record highs. He cites the rate of growth of the Sri Lankan money supply and concludes that inflation hit record highs because the central bank expanded the money supply by 42 per cent from December 2019 to August 2021. Why isn’t this a critique of MMT, and how do you think about the current inflationary pressures?

KABOUB: Sharma is wrong on two fronts here. First, he is assuming that the central bank actually controls the money supply, when in fact the money supply is an endogenous variable determined by the private sector (consumers, business, and banks). The central bank simply accommodates the needs of the market in order to keep short-term interest rates at a stable target, otherwise it will cause all kinds of instability across financial markets. Second, Sharma is assuming that inflation is caused by an increase in the money supply, when in reality, Sri Lanka’s inflation, like many developing countries, imports its inflation via food and energy imports. The higher the pressure on the external balance, the weaker the exchange rate, the higher the inflation pressure from imported goods. Sri Lanka struggled with these pressures for a decade, and managed to muddle through by accumulating more external debt, which quickly became unbearable after the pandemic (loss of tourism, remittances, FDI, and export revenues) and the massive increase in global food and energy prices after the Russian invasion of Ukraine.

The solutions to Sri Lanka’s inflation problems are not in the hands of its central bank. Raising interest rates in Sri Lanka will not end the war in Ukraine, or end the pandemic-induced global supply chain disruptions. The most effective anti-inflation tools fall under fiscal policy. It is the parliament, and the various ministries and commissions that can design strategic investments to boost productive capacity, and have the legal authority to update and enforce antitrust laws. In fact, raising interest rates can often fuel inflation (and inequality) because it is the equivalent of an income subsidy to bond holders, and a tax on actual investors who might be discouraged from increasing productive capacity

KELTON: Sharma appears to know that he has offered a faulty representation of MMT. He anticipates some of the counterpoints that I suspect you and I would both raise. He writes, “proponents of MMT will likely say that this was not real MMT, or that Sri Lanka is not a sovereign country as long as it has any foreign debt.” You have been studying Sri Lanka for a few years now. What, if anything, have policymakers done that suggest that they have been running any kind of “MMT experiment” over the last two years?

KABOUB: Well, this is where Sharma nails it! As I explained above, Sri Lanka’s economic policies don’t even come close to anything informed by MMT insights. Sri Lanka’s government ignored its structural weaknesses, didn’t invest in food/energy and strategic domestic productive capacity, didn’t tax/regulate abusive market power, has a corrupt political system dominated by a single family, and when it was backed into a corner after the pandemic, it doubled down on bad economic decision by claiming that agricultural fertilizers are unhealthy (when they really didn’t have the foreign exchange reserves to pay for the imports), so they destroyed agricultural output, especially rice, in the middle of global food crisis. If the Sri Lankan government was serious about investing in healthy food or a healthy economy, it would have put forward an actual food sovereignty strategy centred on native seeds, it would have discouraged intensive monoculture farming, it would have invested in regenerative farming to undo decades of damage to the soil, and it would have supported farmers to increase yields with well-defined medium and long term strategies. Clearly, this “organic farming” experiment was sloppy at best, but it should not overshadow the fact that the roots of the agricultural vulnerability have been decades in the making.

KELTON: Sharma chides the government for shunning the advice of “mainstream economists” and for “refusing to even consult the IMF.” Let’s assume he’s right about the central bank and other policymakers turning away from mainstream economists and institutions like the IMF. What kind of advice has the IMF given to Sri Lanka in the past, and what kind of economic development strategies would you recommend if officials called on you to advise them?

KABOUB: Sri Lanka has been following the IMF instruction manual for decades. It has received 16 loans from the IMF since the 1960s, and it is currently negotiating another one. Since 1996, Sri Lanka has never been away from the IMF’s negotiating table for more than 3 or 4 years at a time. Despite the political rhetoric of the Sri Lankan government over the last couple of years, the current Sri Lankan administration has abided by the IMF’s terms and conditions of the $1.5 billion Extended Fund Facility (that’s the 16th loan disbursed between 2016-2020). So maybe the Sri Lankan government has come to realize that the IMF instruction manual is actually harmful. The problem is that they don’t fully understand why, and they certainly haven’t identified an alternative strategy to escape from this trap.

In terms of policy advice, Sri Lanka needs emergency assistance with immediate shipments of food, fuel, medicine, and basic necessities. Sri Lanka needs debt relief rather than debt restructuring. For example, UNDP has recently recommended negotiating debt-for-nature swaps. There are other debt swap mechanisms such as debt-for-development, debt-for-equity, and debt-buy backs. The Sri Lankan central bank should be negotiating FX swap line agreements with the central banks of its major trading partners in order to stabilize the value of its currency.

Sri Lanka should also access the IMF’s newly created $45 billion Resilience and Sustainability Trust (RTS), which, unlike other IMF facilities, is actually a program that funds strategic investments to build resilience and promote sustainability. Sri Lanka would qualify for up to $1.4 billion of concessional loans with substantial grace periods. However, to qualify for RTS funds, Sri Lanka must first have an existing agreement with the IMF. It needs to enter these negotiations with its own strategic vision in order to escape the IMF’s austerity and external debt trap.

The IMF wants countries to establish an economic policy framework that leads to external debt sustainability, but its track record has been a miserable failure. Sri Lanka needs to convince the IMF and other lenders and strategic partners, that it can only escape this external debt trap if it tackles the problem at its source — e.g. by investing strategically in food sovereignty (with an actual long-term strategy rather than half-baked organic farming wishful thinking), investing in renewable energy capacity (energy efficiency, public transportation, etc.), investing in education and vocational training in order to climb up the value chain in the manufacturing sector, and becoming more selective in its support for export industries and FDI projects. In other words, ending the race to the bottom policies, and building resilience to external shocks.

These strategic investments must be coupled with an actual democratization of the political as well as the economic system. The government needs to crack down on corruption, cartels, abusive price setters, and entities that enjoy exclusive economic power and have every incentive to object to the strategic investments listed above.

The sad part of this story is that Sri Lanka is only one of many countries in the Global South facing the same structural traps, struggling with unbearable external debt, soaring food and energy prices, shortages, and rising social and political tensions.

 

[1] The other has to do with a shift toward organic farming that has apparently fueled a precipitous drop in crop yields, farming incomes, and export revenues.

 

Share

Tweet

Whatsapp

Messenger

Share

Email

reddit

Pinterest

tumblr

Viber icon
Viber

The post Reblog – No, MMT Didn’t Wreck Sri Lanka appeared first on The Gower Initiative for Modern Money Studies.

How bad will it get?

Published by Anonymous (not verified) on Mon, 25/04/2022 - 8:15pm in

Woolworths went into administration on 6 January 2009 after 99 years trading. Flickr/Dominic Alves.

There’s an unpleasant calm before the storm feel to British politics at the minute. Anyone who remembers the period from the end of 2006 through to the debacle of autumn 2008, with the failure of Northern Rock as a half-way point, will be familiar with the sensation: of watching an increasing number of the proverbial warning lights start to flash.

This isn’t, however, a repeat of 2008. (In critical respects, it’s worse – a more fundamental malaise.) Back then, from around 2006 onwards, multiplying defaults in the US housing market were amplified by the complex financial products the same mortgage debts had been packaged into, and then traded between major global financial institutions. Over 2007 and right up to the 15 September 2008 bankruptcy of Lehman Bros, these highly leveraged packages of debt were exploding and bringing down larger and larger financial institutions. By autumn that year, the crisis had spread into the dead-centre of the financial system: the giant, world-spanning investment banks, headquartered in the larger developed economies on both sides of the Atlantic, which now faced bankruptcy. Lehman Bros was allowed by the US government to fail; the shockwaves from the overnight disappearance of one of the world’s largest investment banks were so great as to then mobilise panicked support from the world’s major-economy governments. Various packages were rapidly assembled and, by spring 2009, the Bank of England and the US Federal Reserve had embarked on unprecedented money-printing exercise of Quantitative Easing. (Although sometimes presented as a crisis of “Anglo-Saxon” capitalism, or some similar story about the more risk-taking and unstable US/UK version of capitalism, major European banks like Credit Suisse and Deutsche Bank, had seriously overreached themselves.)

Crucially, the mechanism of crisis here was “endogenous”- meaning it was generated primarily inside the financial system itself. It was a classic debt bubble, as described by Hyman Minsky and others, that was bursting. The years of stability over the 2000s had encouraged the taking of more and more risks by financial institutions in the belief that the bubble would never best. But, as in Minsky’s description of the mechanism for crisis, stability generated later instability: the “Minsky moment” occurred when just a few of those debts could not be repaid – in this case, it was the US “subprime” mortgages that defaulted first – and this wobble was amplified by the huge amounts of debt that the earlier period of stability had built up. That financial crisis was then pushed into the wider economy – a sharp retrenchment of lending leading to less spending which, in turn, pushed economies rapidly into recession.

IMF warnings

This time round, the mechanism is (mostly) running the other way: that succession of disruptions to the real economy might provoke a financial crisis which would act as amplifier for the disruption, but not itself operate as a trigger. In addition, the regulations and additional support for financial systems that have been put in place since 2008 have reduced the presence of “systemic risks”, or at least reduced the systemic risks of the kind that played a crucial role in 2008. The system has been subjected to one, immense shock, when covid first erupted in spring 2020, and, whilst there was a brief wobble in financial markets across the globe, nothing like 2008 recurred.

This doesn’t mean there are no financial risks, with the IMF’s latest Global Financial Stability Report highlighting rising leverage (indebtedness) in corporate and household sectors across the world, the weakly-regulated space of cryptoassets, and the unevenness of the recovery from 2020-21 between the advanced and “emerging market” economies. The latter is already producing strains. Sri Lanka, hard hit by covid, is facing shortages of “food, fuel and medicines” and is heading towards a default on its government debt. The government has approached China and the IMF for additional support, with China already offering a $1bn “swap line” of cheap credit – this arriving on top of the $3.5bn its government already owes to Chinese concerns.

One specific risk highlighted by the IMF across “emerging markets” is a version something that was already seen inside the eurozone in the aftermath of the 2008 crash: the “sovereign-bank nexus” turning rotten. With governments borrowing more, it has been banks in the global south who have loaned the money, leaving them with huge amounts of high-risk government debt on their balance sheet. Should a sovereign default, those banks themselves are at risk of failure. This could lead them to (at the very least) reign in their lending to households and businesses, provoking a recession – and then of course bringing the risk of sovereign default that much closer. Coupled with a slowdown in global trade, and the tightening of monetary policy in the advanced economies, particularly the US, which squeezes export markets for the less-developed world, and makes lending into the less developed less attractive, and the stage is set for an economic slowdown followed, in some cases, by default.

This is a relatively familiar story – one that fits easily into our existing ways of understanding economic crises. Either (as in 2008) a financial crisis causes a shock to demand, provoking recession, or a shock to demand provokes a financial crisis, worsening recession. In both cases the mechanism operates on the demand side. (This, incidentally, is what made austerity such a perverse response to the crash: a crisis driven by a collapse in spending was to be countered by… further cuts in spending.)

Supply-side crisis

Instead, the coming recession is emerging primarily as a result of supply-side factors. The rise in inflation, at least for the large, advanced economies in the OECD, is appearing because of rising import prices of essentials like oil, gas and food. It is not the product of “excess” domestic demand – retail sales are falling in the UK, but the prices paid by consumers are continuing to rise. And then there is the impact of concentration in different industries, enabling mark-ups on goods to stay high, and the hoarding of wealth, particularly of housing wealth: whilst consumers have seen their real incomes squeezed hard by rising prices, many large corporations have enjoyed a bumper few years. House prices, meanwhile, continue their upward march, assisted by the production of vast quantities of new, Quantitative Easing money since early 2020.

In all these cases, the causality runs from supply-side disruptions, led by covid-19, now joined by Russia’s invasion of Ukraine and, increasingly, by extreme weather across the world, that then feed into a grossly unequal distribution of ownership and finally turn into a squeeze on most people’s purchasing power as prices rise faster than their incomes. Throw in, on top of that, rising debt – in part as a result of attempting to maintain purchasing power, but itself turning quickly, via rising repayments, into a squeeze on spending – and the stage is set for a significant downturn in the UK and other advanced economies over the next 12 months.

This may not, as in the textbook demand-side recession, produce huge increases in unemployment, at least in the UK, where the “flexible” labour market has enabled the explosion of bogus self-employment, zero hours contracts, and other more insecure forms of work since 2008. We might well anticipate that if real wages are falling (since prices are rising faster than wages), the incentive for employers will be to maintain existing employment, or at least moderate their attempts to reduce costs by making redundancies. But seeing millions of people maintained in increasingly precarious employment, forced to cut back on their own spending as prices continue to rise, would hardly be a good thing.

The short-run solutions depend on two things, neither of which this government seem willing to achieve: rapid increases in wages and salaries, over and above the rate of inflation, and restrictions on price rises in key goods. Rapid increases in public sector pay, and the National Living Wage, both of which the government can control, would induce pay rises across the rest of the economy. Capping energy price rises in October – which, again, the government can determine – would significantly ease pressure on households. Down the line, a restructuring or simple write-off of unpayable household debt may well prove necessary, freeing up additional consumer spending. A short-run programme of rapid redistribution, from capital to labour and from creditors to debtors, would help get over the immediate hump. In the longer term, a more fundamental shift is needed – away from increasingly expensive non-renewable sources of energy and into cheap, domestically-generated renewables, matched to a programme of efficiency improvements such as providing proper loft insulation.  

The post How bad will it get? appeared first on The Progressive Economy Forum.

Canada’s 2022 federal budget

Published by Anonymous (not verified) on Tue, 19/04/2022 - 10:18pm in

Canada’s 2022 federal budget had a very strong housing focus. I’ve written a ‘top 10’ overview of the budget here: https://nickfalvo.ca/canadas-2022-federal-budget-was-a-housing-budget/

Canada’s 2022 federal budget

Published by Anonymous (not verified) on Tue, 19/04/2022 - 10:18pm in

Canada’s 2022 federal budget had a very strong housing focus. I’ve written a ‘top 10’ overview of the budget here: https://nickfalvo.ca/canadas-2022-federal-budget-was-a-housing-budget/

Guest editorial: Homelessness in Canada

Published by Anonymous (not verified) on Thu, 24/03/2022 - 5:01am in

I’ve written the guest editorial for a special edition of the International Journal on Homelessness. The guest editorial provides a general overview of homelessness in Canada (and I believe it serves as a helpful stand-alone reading for practitioners, researchers, students and advocates).

My guest editorial can be found here (in English): https://ojs.lib.uwo.ca/index.php/ijoh/article/view/14810/11659

My guest editorial can be found here (in French): https://ojs.lib.uwo.ca/index.php/ijoh/article/view/14810/11660

The special edition of the journal can be found here: https://ojs.lib.uwo.ca/index.php/ijoh/issue/view/1370

Guest editorial: Homelessness in Canada

Published by Anonymous (not verified) on Thu, 24/03/2022 - 5:01am in

I’ve written the guest editorial for a special edition of the International Journal on Homelessness. The guest editorial provides a general overview of homelessness in Canada (and I believe it serves as a helpful stand-alone reading for practitioners, researchers, students and advocates).

My guest editorial can be found here (in English): https://ojs.lib.uwo.ca/index.php/ijoh/article/view/14810/11659

My guest editorial can be found here (in French): https://ojs.lib.uwo.ca/index.php/ijoh/article/view/14810/11660

The special edition of the journal can be found here: https://ojs.lib.uwo.ca/index.php/ijoh/issue/view/1370

An Accommodative Fiscal Stance Is Crucial for India

Published by Anonymous (not verified) on Wed, 19/01/2022 - 9:04am in
by Lekha Chakraborty and Harikrishnan S.

Omicron is a reminder that the COVID-19 pandemic is still not over. This ongoing health crisis should act as a trigger for greater investments in public health in India. Public spending on health by the union government is still below 1 percent of GDP, though the estimate has increased from 0.2 percent of GDP in 2020–21 (revised estimates) to 0.4 percent of GDP in 2021–22 (budget estimates). Strengthening investments in the healthcare sector is crucial at this juncture, as another lockdown can accentuate the current humanitarian crisis and deepen economic disruptions.

In India, the lockdown was announced on March 24, 2020 by invoking the National Disaster Management Act of 2005. As per the Seventh Schedule of the Constitution, healthcare is addressed at the state-level while interstate migration and interstate quarantine are in the Union List (entries 28 and 81), that is, responsibilities of the central government. While the lockdown helped to flatten the curve, an almost irreversible economic disruption resulted in many sectors.

The National Statistics Office released the advance GDP estimates January 7, 2022, revealing that in the financial year 2021–22 (FY 22), India’s GDP growth rate will be 9.2 percent. In FY 21 it was 7.3 percent. However, this growth estimate is lower than that published by Reserve Bank of India (RBI) in December 2021, which was 9.5 percent. The growth in nominal GDP is estimated to be 17.6 percent. These GDP estimates published ahead of the announcement of the FY 23 union budget are significant as they will be used for projections—including those for the fiscal deficit—in the upcoming budget. How India emerges from the pandemic to meet these estimates will depend largely on an accommodative fiscal policy stance when monetary policy has limitations in triggering the growth recovery.

The central bank has done “whatever it takes” when dealing with the pandemic. The RBI has kept policy rates status quo at 4 percent across several Monetary Policy Committee (MPC) decisions. The reverse repo rate was kept unchanged at 3.35 percent to nudge commercial banks toward engaging in credit deployment rather than parking their funds back in at the RBI. The RBI has not yet formally announced any “normalization” procedure, though absorption of excess liquidity was attempted by increasing the cut-off yield rate of variable rate reverse repo (VRRR) to 3.99 percent (as per the four-day VRRR auction held by the RBI on January 6,2022), and curtailing the government securities acquisition programme.

Absorbing the excess liquidity that was injected to stimulate growth as part of the pandemic response  is crucial to reversing trends in nonperforming assets (NPAs). The RBI report on financial stability, published on December 29, 2021, revealed that the macro stress tests for credit risk indicate a possible rise in the gross nonperforming asset (GNPA) ratio of scheduled commercial banks from 6.9 percent in September 2021 to 8.1 percent by September 2022 (baseline scenario). Under a “severe stress” scenario, the macro stress tests for credit risk indicated that it can increase up to 9.5 percent by September 2022.

Against the backdrop of “taper tantrum” and possible interest rate hikes by the US Federal Reserve, there is mounting pressure on the RBI to increase their interest rates to prevent capital flight. Globally, central banks have started increasing the interest rates, however the RBI has not yet made a firm decision to increase the rate, as it could affect growth recovery.

Inflationary pressures are also mounting. In India, the wholesale price index (WPI) inflation rose to a record high of 14.32 percent in November 2021 as per the data released by the Ministry of Commerce and Industry. The consumer price index (CPI) inflation is 4.91 percent, though that is still within the comfort zone of the inflation targeting framework envisaged in India’s new monetary framework, with the nominal inflation anchor at 4 percent (with a band of +/- 2). However, the widening gap between WPI and CPI is a matter of concern, however, it has been argued that the inflation we are currently experiencing is transitory in nature due to supply chain disruptions and volatile energy and food prices.

Given these macroeconomic uncertainties, maintaining an accommodative fiscal policy stance in the upcoming union budget for FY23 is crucial for a sustainable recovery. The fiscal deficit as a percentage of GDP rose to 9.5 percent in 2021–22 (revised estimates). The RBI estimates suggest that revenue deficit preempted about 70 percent of the gross fiscal deficit during the period 2018–19 to 2019–20, and increased further to 79 percent in 2020–21 (revised estimates) and 76 percent in 2021–22 (budget estimates). Any attempt at fiscal consolidation at this juncture employing capital expenditure compression rather than tax buoyancy can adversely affect economic growth. Public investment—infrastructure investment in particular—is a major growth driver through “crowding-in” of private corporate investment. The initiatives made to strengthen capital infrastructure in the last union budget were welcome, though we need to further sort out the ambiguities related to the institutional mechanisms and financing patterns of the national infrastructure pipeline.

Bringing down the fiscal deficit now can be detrimental to economic growth recovery. The plausible “fiscal risks” arising from the mounting public debt and deficits need to be tackled with a medium-term roadmap for fiscal consolidation, as instantaneous deficit reduction can affect the sustainable growth recovery process.

When credit-linked economic stimulus has an uneven impact on growth recovery, the significance of fiscal dominance cannot be undermined. We argue that the upcoming union budget for 2022–23 should maintain an accommodative fiscal stance in order to support the sustainability of economic growth process and also for financing human development, which is crucial in the time of a pandemic. Rising unemployment needs to be addressed through an urgent policy response that strengthens job guarantee programs.  The welfare models of government in providing food security to poor households and designing gender budgeting in energy infrastructure are also welcome. However, we need to go further to strengthen social-sector policies in the time of a pandemic. The widening digital divide is affecting education outcomes of children, and in a recent anthropometric analysis from the National Family Health Survey (NFHS) (5th round, conducted during January 2020–April 2021) data on stunting and wasting among children indicate malnutrition is an emergency in India.

To deal with these issues and more, maintaining an accommodative fiscal policy stance in the upcoming union budget for 2022–23 is crucial.

 

Chakraborty is a Levy Institute research scholar and professor at India’s National Institute of Public Finance and Policy (NIPFP) and Harikrishnan is an independent analyst.

An Accommodative Fiscal Stance Is Crucial for India

Published by Anonymous (not verified) on Wed, 19/01/2022 - 9:04am in
by Lekha Chakraborty and Harikrishnan S.

Omicron is a reminder that the COVID-19 pandemic is still not over. This ongoing health crisis should act as a trigger for greater investments in public health in India. Public spending on health by the union government is still below 1 percent of GDP, though the estimate has increased from 0.2 percent of GDP in 2020–21 (revised estimates) to 0.4 percent of GDP in 2021–22 (budget estimates). Strengthening investments in the healthcare sector is crucial at this juncture, as another lockdown can accentuate the current humanitarian crisis and deepen economic disruptions.

In India, the lockdown was announced on March 24, 2020 by invoking the National Disaster Management Act of 2005. As per the Seventh Schedule of the Constitution, healthcare is addressed at the state-level while interstate migration and interstate quarantine are in the Union List (entries 28 and 81), that is, responsibilities of the central government. While the lockdown helped to flatten the curve, an almost irreversible economic disruption resulted in many sectors.

The National Statistics Office released the advance GDP estimates January 7, 2022, revealing that in the financial year 2021–22 (FY 22), India’s GDP growth rate will be 9.2 percent. In FY 21 it was 7.3 percent. However, this growth estimate is lower than that published by Reserve Bank of India (RBI) in December 2021, which was 9.5 percent. The growth in nominal GDP is estimated to be 17.6 percent. These GDP estimates published ahead of the announcement of the FY 23 union budget are significant as they will be used for projections—including those for the fiscal deficit—in the upcoming budget. How India emerges from the pandemic to meet these estimates will depend largely on an accommodative fiscal policy stance when monetary policy has limitations in triggering the growth recovery.

The central bank has done “whatever it takes” when dealing with the pandemic. The RBI has kept policy rates status quo at 4 percent across several Monetary Policy Committee (MPC) decisions. The reverse repo rate was kept unchanged at 3.35 percent to nudge commercial banks toward engaging in credit deployment rather than parking their funds back in at the RBI. The RBI has not yet formally announced any “normalization” procedure, though absorption of excess liquidity was attempted by increasing the cut-off yield rate of variable rate reverse repo (VRRR) to 3.99 percent (as per the four-day VRRR auction held by the RBI on January 6,2022), and curtailing the government securities acquisition programme.

Absorbing the excess liquidity that was injected to stimulate growth as part of the pandemic response  is crucial to reversing trends in nonperforming assets (NPAs). The RBI report on financial stability, published on December 29, 2021, revealed that the macro stress tests for credit risk indicate a possible rise in the gross nonperforming asset (GNPA) ratio of scheduled commercial banks from 6.9 percent in September 2021 to 8.1 percent by September 2022 (baseline scenario). Under a “severe stress” scenario, the macro stress tests for credit risk indicated that it can increase up to 9.5 percent by September 2022.

Against the backdrop of “taper tantrum” and possible interest rate hikes by the US Federal Reserve, there is mounting pressure on the RBI to increase their interest rates to prevent capital flight. Globally, central banks have started increasing the interest rates, however the RBI has not yet made a firm decision to increase the rate, as it could affect growth recovery.

Inflationary pressures are also mounting. In India, the wholesale price index (WPI) inflation rose to a record high of 14.32 percent in November 2021 as per the data released by the Ministry of Commerce and Industry. The consumer price index (CPI) inflation is 4.91 percent, though that is still within the comfort zone of the inflation targeting framework envisaged in India’s new monetary framework, with the nominal inflation anchor at 4 percent (with a band of +/- 2). However, the widening gap between WPI and CPI is a matter of concern, however, it has been argued that the inflation we are currently experiencing is transitory in nature due to supply chain disruptions and volatile energy and food prices.

Given these macroeconomic uncertainties, maintaining an accommodative fiscal policy stance in the upcoming union budget for FY23 is crucial for a sustainable recovery. The fiscal deficit as a percentage of GDP rose to 9.5 percent in 2021–22 (revised estimates). The RBI estimates suggest that revenue deficit preempted about 70 percent of the gross fiscal deficit during the period 2018–19 to 2019–20, and increased further to 79 percent in 2020–21 (revised estimates) and 76 percent in 2021–22 (budget estimates). Any attempt at fiscal consolidation at this juncture employing capital expenditure compression rather than tax buoyancy can adversely affect economic growth. Public investment—infrastructure investment in particular—is a major growth driver through “crowding-in” of private corporate investment. The initiatives made to strengthen capital infrastructure in the last union budget were welcome, though we need to further sort out the ambiguities related to the institutional mechanisms and financing patterns of the national infrastructure pipeline.

Bringing down the fiscal deficit now can be detrimental to economic growth recovery. The plausible “fiscal risks” arising from the mounting public debt and deficits need to be tackled with a medium-term roadmap for fiscal consolidation, as instantaneous deficit reduction can affect the sustainable growth recovery process.

When credit-linked economic stimulus has an uneven impact on growth recovery, the significance of fiscal dominance cannot be undermined. We argue that the upcoming union budget for 2022–23 should maintain an accommodative fiscal stance in order to support the sustainability of economic growth process and also for financing human development, which is crucial in the time of a pandemic. Rising unemployment needs to be addressed through an urgent policy response that strengthens job guarantee programs.  The welfare models of government in providing food security to poor households and designing gender budgeting in energy infrastructure are also welcome. However, we need to go further to strengthen social-sector policies in the time of a pandemic. The widening digital divide is affecting education outcomes of children, and in a recent anthropometric analysis from the National Family Health Survey (NFHS) (5th round, conducted during January 2020–April 2021) data on stunting and wasting among children indicate malnutrition is an emergency in India.

To deal with these issues and more, maintaining an accommodative fiscal policy stance in the upcoming union budget for 2022–23 is crucial.

 

Chakraborty is a Levy Institute research scholar and professor at India’s National Institute of Public Finance and Policy (NIPFP) and Harikrishnan is an independent analyst.

The Minister of Housing’s Mandate Letter

Published by Anonymous (not verified) on Tue, 11/01/2022 - 12:56am in

On 16 December 2021, mandate letters for Canada’s federal ministers were made public. The letter for Canada’s Minister of Housing and Diversity and Inclusion contains an important set of marching orders.

I break it down in this ‘top 10’ blog post: https://nickfalvo.ca/the-minister-of-housings-mandate-letter/

The Minister of Housing’s Mandate Letter

Published by Anonymous (not verified) on Tue, 11/01/2022 - 12:56am in

On 16 December 2021, mandate letters for Canada’s federal ministers were made public. The letter for Canada’s Minister of Housing and Diversity and Inclusion contains an important set of marching orders.

I break it down in this ‘top 10’ blog post: https://nickfalvo.ca/the-minister-of-housings-mandate-letter/

Pages