Date:28/06/2011 URL: http://www.thehindu.com/thehindu/br/2011/06/28/stories/2011062851101500.htm
Back Book Review



Fiscal policy discourse

K. SUBRAMANIAN


PROGRESSIVE FISCAL POLICY IN INDIA: Edited by Praveen Jha; Sage Publications India Pvt. Ltd., B-1/I-1, Mohan Cooperative Industrial Area, Mathura Road, New Delhi-110044. Rs. 895.

The emergence of the financial crisis called into question many of the theories and fetishes held sacrosanct in the pre-crisis era. One fetish was about the relationship between monetary and fiscal policies.

Monetarism held sway and the central bankers were certain they had the tools good enough to combat inflation. In this game, fiscal policy had no role and the government was expected to keep its budget in balance and not play spoilsport by running into huge fiscal deficits. Indeed, there is no need for public intervention and free market would do it all. Public interventions especially through budget deficits and debt creation were honorifically referred to as “financial crowding out.”

These notions read like fairy tales now. Monetarism has lost its much vaunted supremacy and is rudderless. In the United States, the Federal Reserve is sitting with the Treasury and evolving stimulus programmes. The International Monetary Fund has recanted its older ideologies and is churning out documents on all aspects of ‘stimuli' as well as exits. There are variants ranging from the U.S. model of bank bailouts ($700 billion) to the Chinese way of pumping in money ($586 billion) to promote new investment. There is no global coordination and each country followed the stimulus programme suited to its resources and national compulsions.

Policy capture

It was a pro-market strategy that marginalised the role of the state. The rise of finance capitalism led to what Venugopala Reddy, D.N. Ghosh and other analysts describe as “policy capture” by the financial conglomerates. In due course, it was subsumed under the ‘Washington Consensus' and embedded in the lending policies of the IMF and the World Bank as conditionalities.

The book under review, which is the outcome of a conference held in 2008, traces the shift in fiscal policies in the post-reform years and describes how it was influenced by the neoliberal policy discourse mentioned earlier. It provides a macro analysis, while some of the papers examine the income trends set off by a regressive fiscal policy. The role of the Finance Commissions and the impact of their recommendations on fiscal federalism are discussed. Understandably, the Fiscal Responsibility and Budget Management (FRBM) Act and its impact come in for serious discussion. The message that emerged from the 2008 conclave was that “all progressive forces should engage to influence the state in order to ensure that opportunities for decent livelihood options and basic minimum services such as primary education and health care are provided to all.” It made out a case for progressive fiscal policies accountable to the people.

In his article, Prabhat Patnaik, while setting the Indian scene in the global context, dismisses the theories of “crowding out” as “humbug finance”, drawing support from Joan Robinson. He was far-sighted in suggesting that a coordinated fiscal programme to combat the crisis could have averted protectionism. He felt the strategy seemed to be to “sustain the financial system and wait for the next ‘bubble' to appear rather than to revive the real economy directly through fiscal stimuli.” How prophetic this proved to be!

Constraint

C.P. Chandrasekhar looks at liberalisation as a constraint on developmental policy. The FRBM Act has restricted the fiscal space considerably and many of the objectives of the 11 {+t} {+h} Plan will remain unrealised. He goes on to analyse how fiscal contraction is sought to be secured through cuts in expenditure rather than through increase in revenues (taxes.) At the same time, extraordinary concessions in income, corporate, and capital gains taxes are granted, creating greater inequality.

The factors behind income inequality are analysed in depth by S.L. Shetty, who cites massive data to support his reasoning. These include the tax regime, corporate management, and the functioning of the financial system. His caution on the explosion of exotic derivative contracts in the forex market is timely.

While discussing the role of the Finance Commissions, it is argued that the 12 {+t} {+h} Commission went beyond the constitutional mandate and sought to impose FRBM on the States by making it a condition precedent for financial transfers. The approach of the 13 {+t} {+h} Finance Commission is similar. It has set ‘fiscal consolidation' as a criterion for eligibility. Such practices undermine the concept of fiscal federalism envisaged by the Constitution. The articles on themes such as social sector expenditure, health, and the right to education reveal depressing trends in those critical areas. That they are largely attributable to fiscal contraction is only one part of the story. The other, and no less worrying, part is that inefficiency and poor delivery also contribute to those trends. Since the holding of the conclave (December 2008), there have been major changes both globally and within India. It would have been helpful if these also have been covered. On the whole, this is a mixed bag: some articles are of high quality; some have the ‘seminar flavour'.

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