A reasonable and healthy intervention in the economic affairs is welcome but tyrannical overreach needs to be discouraged
Deepak Laad
Prior to Keynes’ path-breaking work, “The General theory of employment interest and money” 1936, economists in Britain and America, before the Great depression, had faith in the forces of free market, that the supply and demand of goods and services would automatically generate prices and employment without any need for the Governments to interfere.
Contrary to this was belief of Keynes who believed that prices and wages are slow to respond to the demand and supply forces and thought demand was more powerful in driving economic growth. He found the markets fundamentally weak -- prone to booms and bust. Keynes advocated solution to the problem by increased government spending and intervention in the economy primarily to stimulate demand.
Three decades later, Milton Friedman’s ‘Capital and freedom’ was published in the year 1962, which stressed on rationality of the Individual and his action and abhorred interference from
the government in the economic systems. It believed an economic system simply needs to be left to the forces of demand and supply with minimal or no government interference. This was in line of thinking with another liberal economist – the eighteenth century economist Adam Smith, who too had believed in the ability of free market forces to create sensible outcome for the population without any interference from the Government. Friedman was also influenced by Friedrich Von Hayek of The Austrian school who argued that, “any increase in state planning is the first step on the way to tyranny.”
Keynes advocated only intervention but our present dispensation at the Centre believes in going head-on interfering in the functioning of the autonomous economic institutions and policy making bodies and the tyranny is obvious and blatant. In those institutions where at the most government’s hand should have been seen, we now see it’s whole body as anyone showing dissent is replaced with their own pliant one. We have seen Vice Chairman of NITI Ayog and Chief National Economic
advisor come and go. Both, academicians of economics, with excellent track records marched out when could not find them on the same page as the government. Both cited identical reasons for their exit -- ‘personal’. We have seen departure of two RBI Governors during the present government’s tenure.
Chicago school of economics lays emphasis on deriving policy decisions studying quantitative analysis of behavioral data. So Raghuram Rajan who held his ground and resisted interest rate
cuts postulating there was no merit implementing the decision as economic conditions in the country were not supportive, was denied a second term. His deputy Urjit Patel who was elevated as Governor in his place fell out with the government and left when it was insistent on part of the Central Bank’s reserves to be deployed in recapitalizing the banks and narrowing the fiscal deficit.
Now the government has in place a governor who has studied History and knows little of monetary
policies. So if the government makes fresh demand for part of the reserves the new governor may not be averse to the idea of paying it. As it is he is inclined to pay the government dividend to the tune of Rs 40,000 crores.
The recent rate cut decision though taken by the Apex Bank Governor, the government’s hand in the decision is unmissable. The rate cut of 25 basis point was very surprising as there was absence of economic climate to support it. The non-revenue earning non-performing assets piled up with the bank and high cost of interest Bank have contractual obligations to pay the depositors make it difficult for them to run the business profitably if they agree to the RBI announced extent of rate cuts. So the lenders conveying to the RBI their practical inability to pass the announced entire rate-cut down to the customers and instead agreeing to go with it to the extent of only 5 to 10 basis point rate-cut goes to show that the government and RBI did not do their homework and were not
alive to the ground realities. It was a politically motivated populist decision. This was to entice the consumer loan aspirants with reduced EMI, may be temporarily, as we are rounding the last bend to general elections.
It is, indeed, difficult to comprehend why the Government should get all worked up whenever the fiscal deficit rise above the budgeted level. It rushes to all sorts of firefighting and window dressing in an effort to rein it in. Once that done it pats it’s own back. William Phillips’ theory states that when inflation increases unemployment will fall. Truth is inflation helps in making investments and leads to job generation. But for that to happen the investment should be in the right areas and it also
depends on the quality of government investments. If the amounts are spent to increase employment in government department that fall in the category of ‘disguised employment’ without any qualitative output it defeats the very purpose.
From the government’s side a reasonable and healthy intervention in the economic affairs is welcome but tyrannical overreach needs to be discouraged.
