To paraphrase a 16th century Scottish nursery rhyme, if election manifesto promises were horses, then India’s poor would fly. The Congress party has promised ₹72,000 per year to the bottom 20 per cent of the country’s households. This was preceded by the interim Budget’s proposal, under the PM Kisan programme, of paying ₹6,000 per year to every farming family with a holding of less than two hectares.

The mainstream economics view is that such promised expenditure, if actually incurred, will be seriously inflationary. But fascinatingly, economic thinking itself is changing, both in the Indian context and globally.

In India the realisation is dawning that exemplary macroeconomic management can give you world-beating 7 per cent plus growth along with price stability, but still end up being critically lacking. Widespread rural distress and high unemployment are raising serious questions about the usefulness of such growth.

Neighbouring Bangladesh lags behind India in terms of per capita incomes but scores better in terms of most human development indicators, indicating a high level of well being. Hence, the thinking is dawning that it may be better to pursue foremost better outcomes for indicators like life expectancy, infant mortality, malnutrition, women’s education and the disease burden and let growth take care of itself.

Modern monetary theory

As if by a stroke of good luck, there is also a stir in global economic thinking which seeks to address similar issues. In the US, progressive Democratic politicians like Bernie Sanders and Alexandria Ocasio-Cortez are swearing by a new economics, modern monetary theory, to help deliver goals like medicare for all and the green new deal.

Mainstream economists have pointed out that this theory is not all that modern as Keynes had in his General Theory prescribed countercyclical deficit spending to stabilise the economy and Roosevelt’s New Deal sought to put worries about rising national debt behind itself.

Robert J Schiller, the Yale economist, has in an article in the New York Times tried to spell out what modern monetary theory is all about and what are its limitations. His point is: “We should not react automatically against new expenditures that increase the deficit. There do appear to be some urgent needs that might justify more debt for a while. But acknowledging this… does not license unlimited spending or carelessly adding debt upon debt.”

The critical point is, it makes sense to spend when the return on government investment in areas mentioned above exceeds the rate at which the government borrows. Schiller agrees with what is implied in Ocasio’s position: Inflation needs to be monitored and government shouldn’t borrow and spend excessively.

In a report in the Times , Patricia Cohen notes something quite unexpected happening. Modern monetary theory, which goes against the grain of conventional economics, is attracting a conspicuous number of fans in, of all places, Wall Street. There some money managers are using it to build economic forecasts and even trading strategies.What has lent validity to their thinking is how in the post 2008 financial crisis those who bet on interest rates remaining low, got it right. One of them said he had been telling his clients for years that even with huge budget deficits in the US, interest rates would actually come down, not go up.

So now there is a debate on whether governments can run larger economically sustainable deficits than was previously thought prudent.

The obverse of a federal deficit is a public surplus, held in the form of bonds. As long as the US government invests in projects that produce an economic return greater than the yield on 10-year treasury notes, currently at 2.5 per cent, this will never be a burden on taxpayers. So the fact that India is looking at the prospects of introducing near universal income support which is likely to add substantially to the budget deficit should not be seen as an impending calamity. What the government has to be alert to is the danger that at some point it can lose focus and just keep printing money to incur committed expenditure. Then and only then, will there be the risk of runaway inflation.

What is critical is that the government spending enhances the productive capacity of the economy. More buying power in the hands of the poor can boost demand for food and food prices, benefiting farmers. Higher public spending on health should reduce the disease burden and spending more on education should pave the way to greater skill formation. What is important is that government hospitals and schools are properly run, as in Kerala and not in Jharkhand. It is more important to worry about governance than government deficit per se.

The writer is a senior journalist

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