ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The Story of Currency in Circulation

The impact of demonetisation on the movement of currency in circulation in India over time is examined. Four different models of currency in circulation are used to estimate these models using weekly data from April 1992 to October 2016. An analysis of out-of-sample forecast performance of these models prior to demonetisation reveals that the series could be forecast well before this event. Out-of-sample forecast errors of these models during the post-demonetisation period are, therefore, interpreted as shocks due to demonetisation. As far as weekly growth rates of the series are concerned, we observe no major change in intra-month seasonality in currency in circulation once the shock due to demonetisation mitigated.

Demand-led Growth Slowdown and Inflation Targeting in India

A variety of indicators are presented to show that demand restricted output during the growth slowdown of 2011–17. The macroeconomic structure of the economy is such that a policy-induced demand contraction affects output more than it affects inflation. In this context it is important to evaluate the application of inflation targeting. Flexible inflation targeting was too narrowly and strictly implemented initially, although there are signs of moderation in 2018. Since inflation forecasts were biased upwards, the more effective expectations anchoring channel of inflation targeting was underutilised. The output sacrifice imposed was higher than necessary. Finally, possible mechanisms to ensure inflation targeting is implemented flexibly as required in the Indian context are discussed.

Foreign Finance, Real Exchange Rate, and Macroeconomic Performance in India

The paper examines whether financial inflows cause economic contraction in India through appreciation of the rupee. To this end, it formulates a structuralist macroeconomic model and calibrates it to India’s national income accounts. It then simulates and analyses an alternative scenario involving greater inflow of foreign finance. It is seen that real exchange rate appreciation, despite its negative effect on trade surplus, stimulates real wages and consumption demand. The paper does not endorse complete capital account convertibility but warns against a blanket approach towards different forms of foreign finance.

Mortgage Loans, Risky Lending, and Crisis

The link between the loan market and the housing market that works through mortgage loans is critically examined. Repayment of such mortgage loans depends on the future earning potential of the borrowers, which in turn depends on the overall state of the macroeconomy. Under buoyant macroeconomic conditions, all borrowers pay back their loans and both the loan market and the housing market function well. However, a temporary income shock in the economy, which undermines the repayment ability of the borrowers, may result in imprudent lending by banks thereby leading to a crisis. This calls for strict monitoring of mortgage loans by regulatory authorities.

Plurality in Teaching Macroeconomics

For economists, the Great Recession—the worst crisis the world has seen since the Great Depression of the 1930s—has highlighted the need for plurality in macroeconomics education. Ironically, however, there is a move towards greater insularity from alternative or contrasting points of view. Whereas, what is required for vibrant policymaking is an open-minded academic engagement between contesting viewpoints. In fact, there does not even exist a textbook that contrasts these contesting ideas in a tractable manner. This pedagogical paper is an attempt to plug that gap by presenting a comparative study across different traditions in macroeconomics in a unified framework, which can be developed into a semester-long intermediate-level course.

Monetary Economics of Fascism and a Working-class Alternative

Fascism is the usurpation of the economic process by the elite and the related decimation of the working class and the poor. This process is represented by the shrinkage of fiat money backing the production of goods and services and its substitution by financial instruments. This domestic coup is accomplished by the spread of what is generally referred to as “false consciousness.” The tools of basic economics can be fashioned to introduce students to these concepts. Mainstream economists continue to demonstrate the different ways utility functions can be manipulated.

Some Analytics of Demonetisation

Given the difficulty of a reasonably rigorous assessment of the long-term effects of demonetisation, its macroeconomic consequences in the short run are analysed. Standard macroeconomic tools are moulded for this purpose. It is found that there is a fall in demand as well as in supply-constrained output.

Too Little, Too Late

The last budget of the Modi government comes against the backdrop of severe agrarian and rural distress. It is also the last opportunity to undo the damage caused to the rural economy by this government in the last four years. While the government has finally acknowledged the gravity of the situation, its response has been limited to empty rhetoric without any financial commitment. Going by the past record of the government, it is clear that it is serious neither in its commitment nor in its intent. The half-hearted measures are not only too little and too late, it is also clear that this budget is unlikely to revive the rural economy.

In a Macroeconomic Bind

Despite it being the government’s last full budget before the general elections in 2019, the finance minister, constrained by his self-imposed fiscal deficit targets, settled for rhetoric and promises that were not backed with allocations. This frozen macroeconomic policy has foreclosed all options to adopt proactive measures that could make a difference to those who need support. Yet, the financial interests he wants to impress also seem disappointed.

Incongruence between Announcements and Allocations

A scrutiny of the Indian economy and the state of public finances reveals that while there are a few areas of improvement under the current government, the economy remains fragile and, worryingly, the situation has worsened in some other respects. It was hoped that the Union Budget 2018–19 would take measures to address some of these concerns but these expectations have been belied. Budget 2018–19, possibly with an eye on elections, has made grand announcements instead of taking hard decisions and making adequate allocations towards key sectors of the economy.

A Confused Taxation Narrative

The Union Budget 2018–19 was presented against the background of a slippage in the fiscal deficit levels. The government has reiterated its commitment towards fiscal consolidation. In this context, an attempt is made to understand the tax revenue numbers for 2017–18 and 2018–19. The analysis suggests potential shortfall in the revenues budgeted for 2018–19.

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