India's Macroeconomy

This is a book of articles on finance and the macroeconomy of India after the global financial crisis, written by those who have a perspective that the editors broadly describe as having a commonality with post-Keynesians. To me the essence of this approach is to stress that in a monetary production economy, the level of economic activity is set by the level of effective demand and that this is usually not consistent with full employment. The capitalist system based on free market principles is, in this view, inherently cyclical and unstable.

Indeed, the first article in the book on an Indian perspective on monetary policy by Dilip Nachane argues that since financial markets in India are far from efficient, an excessive reliance on market discipline of financial institutions, emphasised as one of the three pillars by Basel II, is of limited value. This well-argued chapter makes a case for deposit insurance premia that are risk-based rather than flat-rate, and the introduction of mandatory subordinated debt in bank capital requirements so as to restrain risk-taking by banks. There is also a case made out for monetary policy targeting asset prices, as a central bank should not be a bystander whilst an asset boom is in progress and a Good Samaritan once the boom goes bust. Whilst stated starkly, in operational terms this leads to conflicts between the objectives of monetary policy.