Sunday, July 12, 2009

Mukherjee at Minsky Moment

In India, Mr. Pranab Mukherjee presented his first budget of this term on July 6th. The budget speech was criticized heavily by economic luminaries. Sensex responded by falling down by 870 points. Pranab Mukherjee has gone into a spending spree on infrastructure and building social security safety net. Dr. Jayaprakash Narayan called it a lackluster budget with fiscal deficit crossing Rs. 10 lakh crores. While I agree with Dr. Narayan’s point on reduced allocation to healthcare, I beg to disagree with his view on country’s deficit control.

I accept that India is in the middle of a huge debt. But let us not blame Mr. Mukherjee for this. We have been running huge fiscal deficit for the past several years. Currently we are in the middle of a great recession. This is not the right time for deficit control. Mukherjee did the right job, a Keynesian economist’s job, by increasing the fiscal spending to control the impact of the downturn. While fiscal deficit is something that we have to control in long run. At the middle of Minsky moment, Pranab Mukherjee has done a decent job by not minding it this time.

However once the recession is over, the finance minister (whoever will be, at that time) must ensure to reduce the fiscal deficit in the same Keynesian style with which they increased fiscal spending this year. Don’t care about the reaction of Sensex; don’t care about Narayan’s comment. You have done a good job at the bad time, Mr. Mukherjee! Fiscal deficit control? Previous finance ministers should have done it. Future finance minister should do it. Not this finance minister.

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