A wider deficit is unavoidable to strengthen demand -Ajit Ranade
Thankfully, India is enjoying a demographic dividend that gives it greater leeway for deficit-financing
The dominant consensus on the slowdown in India is that we have a demand problem. Lack of aggregate demand is a phrase that goes back to John Maynard Keynes. He is a ghost who reappears from time to time, however much one tries to bury him. Regardless of whether you are a Keynes devotee or not, his logic is irresistible, both to the policymaker and the common man, or woman. If there is insufficient demand on account of inadequate consumption, investment or exports, it ought to be offset by the government stepping in. That is to say a fiscal push is inevitable. Only once the government creates demand for goods and services through extra deficit-spending will new jobs and incomes be generated, which in turn will create fresh demand for goods and services, setting off a virtuous cycle until the economy can run on its own steam without fiscal steroids.
The idea of deficit-spending divides economists into anti-deficit fundamentalists and “deficits do not matter" shoulder-shruggers who tend to support any amount of fiscal profligacy. Actually, most well-meaning, classically-trained economists fall in the former camp, and they see opposing deficits as a noble duty because nobody else champions the moral cause of austerity or balanced budgets. The libertarians among them oppose deficits also because they don’t trust the government. Conventional theory says that uncontrolled deficit-spending will lead to high debt and interest rates, inflation and ultimately a crisis that will call for debt repudiation. That will lead to a loss of investor confidence and growth. This is the doomsday scenario. But India’s experience of the past three decades has been that despite a relatively high deficit, its economy has grown at a fast pace without runaway inflation, let alone debt repudiation.
For a developing country, deficit-spending makes sense. This is because the growth benefits of that spending accrue over multiple generations, so that today’s benefits are paid by taxes on tomorrow’s unborn citizens. This is sensible both from efficiency and fairness points of view. For, if a bridge or airport is financed through a deficit today, it is a public good that will last for more than 50 years and whose benefits will be enjoyed by multiple generations. So long as the country’s demography is such that more beneficiaries are expected to be born than there are today, the per capita burden of today’s deficit-spending will be lower tomorrow.
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