Summary
India is a unique country, both from a structural perspective and in its various idiosyncracies related to diversity (both geographical and people), race/ casteism issues, geopolitical idealogies and financial inclusion issues. There are various areas where general and classical economic theories (as applicable to Western countries) may not be applied to India. This series of articles covers macroeconomics in India and offers explanations and insights into India macro & financial systems.
Analysis
Keynes’ work in the 1930s profoundly affected macroeconomic policy development across western economies. Most emerging countries have broadly followed Keynesian policies – ?primarily advocating the use of fiscal and monetary measures?to mitigate the adverse effects of economic recessions and depressions. All these measures were implemented by responsible and accountable governments in the western economies. In India, it is a fact that corruption and misappropriation of wealth allocated to the poor through government schemes has resulted in most policies being ineffective and toothless, since almost nothing reaches the poorest sections of society. Rajiv Gandhi, ex-Prime Minister of India once remarked that out of every rupee (100 paise) spent through central government schemes about 10-15 paise reached the poor, which implies that about 85-90% of the nation’s wealth has been misappropriated over a period of time by the rich and the powerful.
Keynes spearheaded a revolution?in economic thinking, overturning the older ideas of neoclassical economics?that held that free markets?would in the short to medium term automatically provide full employment, as long as workers were flexible in their wage demands. Keynes instead argued that aggregate demand?determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment.?
The financial crisis of 2008 led to public scepticism about the free market consensus even from some of the economic right. There has been a resurgence of Keynesian economic principles in recent times, advocating that the government should regulate markets more strictly and that increased fiscal stimuli would lift the world out of recession.?
In India, Keynesian policies will mean fettering of private sector enterprise in a period of high growth and increased wealth misappropriation as governments spend more. On the other hand, neoclassical economics advocating free market policies will find it difficult to work because of rigid labor policies and other general economic stickiness (prices, wages, expectations).
In this situation, targeting (and moderating) growth should be the real concern and economic policies should heed this more than other concerns (e.g. inflation), especially efforts to control inflation through Keynesian policies like monetary tightening.
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
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