A continuation of populist policies

Why is this government throwing every caution to the wind ? Rs 60 billion from BOM of foreign reserves to government without really assessing all the risks and Rs 8 billion from the ADB not the IMF. (reimbursing ADB the Rs 7 bn from the Reserve Fund was a blunder then !)

It wants to continue with its populist policies and expects to ward off the day of reckoning some one to two years down the road with the hope that by that time, the global and local economy would have really picked up and would bring in some badly needed relief.

Together with the criticisms about their proposed measures, there have been a lot of valid propositions /alternatives that have been made. But this govt knows best and it will not budge an inch . Their populist measures did deliver , not in terms of containng the elevated levels of the budget deficit or public debt or in getting the economy out of the trough , but in scoring quick wins at the last elections and they are likely to stick to the same economic philosophy- the populist ideology that came to dominate the years preceding the last general elections will be maintained. 

These lines from El Figaro's article In L'Express of the 16th May, may summarise it “ Existe-t-il un autre pays où un gouvernement prend autant de mesures pour s’assurer que les seniors ne soient pas dépourvus de ressources pendant le confinement lié au Covid-19? Mais ce n’est pas tout. Depuis plusieurs jours, un autre cortège de véhicules officiels part dans tous les quartiers du pays, invitant, par voie de haut-parleur, les senior citizens à venir se faire vacciner contre la grippe. Même Marx, même Lénine, n’aurait imaginé une telle situation dans leur quête pour l’établissement d’un paradis socialiste sur terre.”

Every country is developing specific processes for allocating funds to limit the human and economic impact of the COVID-19 pandemic. These specific processes or budgetary practices have attracted a lot of attention and many high profile economists/Governors of central banks have joined in the debate on pure money creation by central banks to directly finance the fiscal deficit as an exceptional measure to fund the higher-than- expected spending.

Why is such financing so attractive, in theory at least? Because when the level of government debt is high, such money-financing of the increased government spending is not paid for by issuance of new government debt to the public. Thus, it does not increase public debt. Moreover, it induces consumer spending as households are aware that it will not increase future tax burdens and with the lower real interest rates ( as a result of a temporary increase in inflation), incentivizing capital investments and other spending, the economy stands a better chance of getting back on track.

The limitations of such printing of money and its limited applicability in some less advanced open economies are because a) the increase in the money supply associated with monetary financing inevitably leads to higher expected inflation than would be the case with debt-financed fiscal policies. b) Unlike in advanced economies which issue debt in reserve currencies, other economies do not have this luxury and thus are more likely to face capital flight and excessive depreciation of their currency and c) monetary financing may be more relevant for those economies which are much less open than ours and which have a degree of exchange control and thus on imported inflation d) the mere provision of liquidity to boost demand may not be of much help because the productive system does not respond as rapidly as in advanced economies. Moreover, the absence of material inputs globally and domestically can clearly make it difficult for the production system to respond rapidly to the increase in demand, resulting in a spike in inflation and an acceleration in the depreciation of the rupee, and e) foreign investors and Credit Agencies may be apprehensive of such unconventional policies by emerging market central banks and we thus stand the risk of a rating downgrade.

Please note that even if such money creation, is adopted in advanced economies, it is likely to be a last resort , used sparingly in combination with other measures. Here the regime is too anchored in populist policies to be bothered about the deleterious impact on the economy. (Already some banks and state-owned enterprises are having problems to procure foreign exchange and the rupee continues on its downward trend).

The present regime knows that the odds seemed to be stacked against it now. Their populist policies will continue even if it rattles the already fragile economy and take it to the brink of a crisis. They cannot afford to be squeamish about the economy now, they have other priorities while banking even on a glimmer of a restart of the global and local economy by the end of the year. Meanwhile we will be served with more of “plus socialiste que moi tu meurs” even if it means worsening economic fundamentals. 

Worse come to worse, they will be still around to form a govt "d’unité nationale" to tackle the mess they have landed us into. And the "responsible" opposition will be more than willing to join in. They are just waiting to be called in. They lack a common stand and do not seem to be able to provide better alternative strategies . They are more like headless chickens running helter-skelter and seemed to be still knocked out by the resurgence of authoritarian populism.

4Elisha, Rhitesh Chummun and 2 others

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