Mukherjee at Minsky moment - a clarification

A few friends of mine showed caustic reaction through phone calls to my previous blog by blaming me for not understanding the importance of reducing fiscal deficit. One of them was a professional economist working in a small south Indian university.

Let me clarify my position. In normal period, when foreign banks are not closing at a fast rate affecting jobs all around the world, I am totally in for reducing the fiscal deficit and if required even build up a fiscal surplus. But during the current crisis, I would advise not to go for fiscal retrenchment. The problem in India is not the fiscal deficit as such, but its distribution and how it is funded. Here is the take of Roubini's Global Economonitor on India's situation:

However, the annual growth rate for Community, Social and personal services has remarkably increased to 13.1% in 2008-09 as compared to 6.8% in 2007-08 reflecting the impact of increased expenditures by the Government through financing schemes like NREGS. It is important to notice that such expenditures have not only increased the fiscal deficit beyond the estimated budget for 2009-10, but only 9% of the Indian workforce engaged in Community, Social, and Personal services expected to be benefited through it. Thus the excess flow of subsidized bank credits to GoI for financing the budget deficit is ultimately restraining the economic growth.

Herbert Hoover tried fiscal retrenchment during a downturn that was one of the prime reasons for the Great Depression. FDR's fiscal retrenchment was the reason for a double-dip depression. During both these times, many economists and Wall Street welcomed the move. But in hindsight, it turned out to be an incorrigibly bad choice. Here is the President's chief economic advisor talking about the lessons from the Great Depression. I am just happy that India is not repeating that mistake.