Japan's Finance Minister Aso speaks of the 'deflation mindset'. He cautioned that Monetary Policy alone cannot work. There are important inferences to be drawn here.
a) The back seat driving by global Governments through utilizing Monetary Policy as the first recourse and as the arm of the public policy per se may not really be working. Otherwise , QE should have pulled Japan out long ago.
b) Fiscal policies are direct: they place purchasing power directly in to the hands of the people while the central banks have to depend on monetary transmission mechanisms. The commercial banks can thwart central banking policy objectives. (Example Indian banks refused to pass on reduced rates to the consumer borrowers)
c) The time impact of fiscal policy is immediate as there are no intermediaries.
d) The perspective of the fiscal policy bearers are political; they may look to the long term. The Central Bank is answerable for the financial stability and market volatility which are in the short term.
e) There are several leakages possible in the fiscal policy route as is evident from the experience of developing countries in Asia and Africa.
f) The contraction of fiscal spending in Europe may have harmed it more than helped.
g) Sentiments matter: 'deflation psyche' has to go.
Strong inferences:
a) The back seat driving by global Governments through utilizing Monetary Policy as the first recourse and as the arm of the public policy per se may not really be working. Otherwise , QE should have pulled Japan out long ago.
b) Fiscal policies are direct: they place purchasing power directly in to the hands of the people while the central banks have to depend on monetary transmission mechanisms. The commercial banks can thwart central banking policy objectives. (Example Indian banks refused to pass on reduced rates to the consumer borrowers)
c) The time impact of fiscal policy is immediate as there are no intermediaries.
d) The perspective of the fiscal policy bearers are political; they may look to the long term. The Central Bank is answerable for the financial stability and market volatility which are in the short term.
e) There are several leakages possible in the fiscal policy route as is evident from the experience of developing countries in Asia and Africa.
f) The contraction of fiscal spending in Europe may have harmed it more than helped.
g) Sentiments matter: 'deflation psyche' has to go.
Strong inferences:
- Coordination by the Fiscal & Monetary Policies is a must (Radcliffe Committtee of the UK advocated so decades back; it still holds)
- Private sector always expects favourable Government intervention and contributions.
- The policy of India's PM Modi seems target driven: seek investment from the private sector abroad and at home ; have big ticket capital infrastructure spending, generate jobs .
- One cannot expect the private sector to enter gestation lagged projects which pay back in the long run. So the Government has to take a lead role. Spill over and ancillary job creation should raise household incomes and in the medium term reduce 'Make in India' Costs.
- India and China signed $ 22 billion worth business deals during Modi's visit to China. This will go into manufacturing and infrastructure sectors.
- South Korea offered India $ 10 billion to build Smart Cities and other infrastructure building.
So Modi is seeking to use fiscal policy to give direction to a growing economy.
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