Articles by Mihir Rakshit

An intriguing phenomenon in the Indian economy in the recent past has been the movement of inflation - in wholesale and consumer prices - between 2006 and 2010. This was a period - covering the pre- and postcrisis years - during which gdp growth was, first, very high and stable, only to be followed by sharp deceleration and then by a quick recovery. This paper sets out to analyse the movement of inflation over these years and the factors underlying the shifts. The policy dilemmas for the government and the central bank are discussed, as also what conventional theory suggests could be the causes and solutions. It concludes with a discussion of the likely challenges in the future.

The recommendations of the Thirteenth Finance Commission, made in the context of the fiscal stress that was experienced during the global crisis, include relaxation of fiscal targets for purposes of macrostabilisation, preparation of a fiscal adjustment programme for 2010, raising both public and private investment by creation of fiscal space for government capital expenditure and ensuring fiscal viability. The commission's emphasis on allowing for macrostabilisation as a means of raising productive investment is unexceptionable, so too are many of the reforms that have been suggested. However, the lack of an adequate analytical framework has made the overall recommendations less than satisfactory. This inadequacy is reflected in a failure to identify the basic conditions that call for anti-recessionary measures and their optimal combination, a neglect of distortionary and gdp-reducing effects of subsidies, viewing outlays on human resource development as current rather than capital expenditure, a neglect of conditions governing crowding in and crowding out of investment, treatment of disinvestment as part of investible resources and the clubbing of domestic and external debt and of debt held by the public and the Reserve Bank of India.

Contrary to popular belief, there were palpable signs of the Indian economy losing steam long before the outbreak of the global crisis. But there is little doubt that the global meltdown has seriously aggravated the problem and made the task of reversing the domestic downturn much more difficult. For an adequate appreciation of the country's ongoing economic slide, this paper considers the domestic as well as the external factors at work both before and during the crisis.

This paper critiques the approach and recommendations of the 2004 government of India expert group on foreign institutional investment flows. The groupâ??s approach raise several important analytical and policy issues. The most crucial of these relate to effects of FII flows on (a) aggregate and sectoral investment; (b) behaviour of financial, including foreign currency, markets with special reference to their volatility; and (c) efficacy of fiscal and monetary instruments in attaining the objectives of macrostabilisation and growth. The article examines the macroeconomic impact of FII flows in the light of the Indian experience, and draws some policy conclusions regarding the role of such flows. It also addresses the issue of volatility in the Indian context. It finds there is no coherent macroeconomic model behind the expert groupsâ??s analysis and recommendations; no appraisal either of the optimal scale of capital inflows or the relative merit of FII vis-à-vis other categories of capital receipts at the current juncture of the economy; and no examination of monetary/fiscal problems associated with FII or of the quantitative impact of such flows on investment and other macro variables.

The TFC?s focus on growth as a key element of its fiscal reform strategy is well taken. Also eminently sensible are its recommendations for performance budgeting; doing away with the distinction between Plan and non-Plan expenditure; and transparency including elimination of all hidden subsidies. However, the major weakness of the strategy consists of not dovetailing demand management policies in a developmental programme; ignoring the saving-generating impact of investment in an economy where rural and informal sectors are characterised by considerable underutilisation of resources even while the formal sector may not have much slack; treating education, health and other social sector expenditures as current; and absence of optimality considerations in respect of allocation of expenditures and of alternative modes of their financing, taking into account their short- and longer-term effects on growth, equity and government finances.