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

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Once More on the ‘Humbug of Finance’

While an expansionary monetary policy acts by respecting private rationality, an expansionary fiscal policy, involving larger government expenditure financed by a fiscal deficit or taxes on capitalists, implicitly highlights the limitations of private rationality. Finance capital not surprisingly opposes the latter, even though the proffered arguments for “fiscal responsibility” have no theoretical validity. Given the current world economic crisis, a spate of beggar-my-neighbour policies are on the horizon.

Business as Usual

The global situation is tense, marked with protectionism. The domestic environment is constrained by the twin balance sheet crisis. The dull investment climate was further jeopardised by the note ban. The budget has failed to create a policy environment to kick-start a virtuous investment cycle. It has failed to address critical issue of accelerating employment.

Not for Growth

Sticking to the firm commitment to contain fiscal deficits, the reduced thrust on government spending does not seek to be countercyclical given that economic growth is falling. There is vast scope to step up collection of corporate taxes by widening the tax base through greater compliance.

Reading between the Lines

While presenting his government's budget for 2002-03, the Maharashtra finance minister has made a number of major policy pronouncements intended to set the finances of the state in order. This may be music to the ears of reformers, but two things need to be kept in mind. One, similar pronouncements have been made in the past on some matters, but the government has failed to carry them out. Two, one must look at the fine print before rushing to judgment.

On Fiscal Deficits and Real Interest Rates

The proposition that the size of the fiscal deficit affects the level of interest rates is theoretically completely erroneous, which in turn makes the budgetary strategy fundamentally flawed.
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