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NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY Volume I | Issue 1 • OCTOBER - NOVEMBER 2016 The ornithology of macroeconomic policy: India's new monetary policy framework

SASHI SIVRAMKRISHNA

No one is free, even the birds are chained to the sky. mall farmers. Majority of the – Bob Dylan farmers (82%) borrow less than Rs 5 lakhs, and 18% borrow inflation as an economist but was by the government.5 However, once between Rs 5 – 10 lakhs on a The hawks have landed able to utilize his overwhelming the dust settled, a more balanced per annum basis. Most farmers Hawks, doves and owls – some even personal aura to win support of the picture emerged6; in fact, Rajan (65.79%) ar speak of seagulls – but what have popular media and, at the same time, himself considered the formation of birds got to do with exert pressure on the government to the MPC as one of his unfinished macroeconomics? At first, such pay heed to his strong views. tasks at the RBI.7 But why would a ornithological labels seem an apt way Institutionally speaking, success came hawk want to propose and accept any of describing personalities of close to the very end of his tenure4, in dilution in autonomy over the setting individuals. Indeed, to an extent, August this year, when the of interest rates? The answer is not they are. But there is something more government notified the Lok Sabha of obvious. The inflation target along significant in these ornithological tags the retail inflation target of 4% (+2%) with an MPC that decides on interest that may often be overlooked; a as the anchor for monetary policy rates makes monetary rule-based discerning categorization of the until 2021. Being able to implement rather than discretionary, which, as diverse schools of macroeconomic parts of the Urjit Patel committee we will see, ultimately constrains thought that individuals in key report – that made inflation targeting fiscal policy. An inflation hawk is positions subscribe to, with far the primary objective of monetary essentially also a (fiscal) deficit hawk reaching consequences. policy – was no small victory for and is aware that binding the central Rajan. The hawk may have lost the bank to rules will shift the burden of In the Indian context, Governors of battle with Subramanian Swamy, but inflation control to the Ministry of the Reserve Bank of India (RBI) have had won the monetary policy war. Finance and the Union budget. In his often been subject to ornithological last public speech as the Governor of labelling for their stand on inflation. A new framework for monetary policy the RBI, Rajan made a very candid Going back to the not-so-distant past, is now clearly emerging in India; an remark that went unnoticed in most Y. V. Reddy, in spite of having raised inflation target approved by the newspaper reports; interest rates sharply during the government along with a Monetary boom prior to the Great Recession of Policy Committee (MPC) that will set 2008, was never unequivocally interest rates. Based on the The inflation objectives recently set labelled an “inflation hawk”; in fact, recommendations of the Urjit Patel for the RBI by the government are to describe him as one was Table & Image source Committee, the MPC will consist of an example of what is needed. considered “unfair”1. His successor D. six persons, three from the Reserve Critics can lambast the RBI if it fails Subbarao was more definitely Bank including the Governor and continuously to meet the “hawkish” although not always three appointees of the government, objectives, but if they want it to categorically considered a “hawk” with a decisive vote granted to the lower interest rates even when the since there were times when it Governor in case of a tie. But why RBI barely meets its objectives, seemed he had not raised rates would a central bank want to limit its they should instead petition the sufficiently to tame inflation2 and powers in favour of an MPC? When government to change the other times when it seemed he was the announcement first appeared, objectives … For example, with an willing to compromise, albeit just a many economic commentators inflation focused framework, the little3. It was, however, Raghuram reacted adversely, especially on the RBI’s ability to be accommodative Rajan, who earned the title of a true strength and composition of the depends on fiscal prudence from “inflation hawk”. Not only was he 8 MPC, arguing that the RBI’s the centre and states. able to propound his views on autonomy was being compromised

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NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY Volume I | Issue 1 • OCTOBER - NOVEMBER 2016 Volume I | Issue 1 • OCTOBER - NOVEMBER 2016

In spite of these strategic successes in Even in recent times, Rajan clearly called “interest rate doves” because dreaded bogey in the free market competition and innovation. Rajan state has two key macroeconomic institutionalizing a new monetary articulated the views of an inflation they take a firm stand on interest capitalist narrative, distorting the embodied this inflation-centric view goals - high output (growth) and a policy framework, or perhaps and deficit hawk; rates rather than on inflation per se. functioning of the price mechanism in when he told the media and analysts, low and stable inflation.23 Fiscal because of them, Rajan’s term at the A popular definition of (inflation) many ways including uncertainty over “Our [RBI’s] job is to give people policy consisting of government helm of the RBI was not renewed. Ahead of the Budget, RBI doves is provided by Investopedia: exchange rates that adversely affects confidence in the value of the rupee, expenditures and taxes, targets But even in his exit, he scored a Governor Raghuram Rajan today international capital flows, difficulty in prospects of inflation and having output, while monetary policy victory over his opponents when the warned against generating Dove refers to an economic policy for firms to distinguish changes in established that confidence, create through the instrument of interest government appointed Urjit Patel as economic growth through advisor who promotes monetary relative prices from changes in the longer-term framework to take good rate,24 targets inflation. Figure 1 the new Governor of the RBI. With additional debt [fiscal deficits] policies that involve low interest general price level so that use of decisions …”20 Another remark made below presents a schematic this decision, the government had saying that any deviation from the rates, based on the belief that low lower priced inputs may not take by him was even more definitive; representation of the assignment of indicated its desire to maintain fiscal consolidation path will hurt interest rates increase employment.17 place, rising interest rates as lenders “We must take advantage of the targets to goals. What must also be mall farmers. Majority of the continuity in Rajan’s policy initiatives. the stability of the economy.12 incur losses on capital lent and need circumstances [including low global specifically highlighted here is that farmers (82%) borrow less than Unlike many of his predecessors, While interest rate doves (we for risk premium, aggravating commodity prices] to bring inflation while there is a specific inflation Rs 5 lakhs, and 18% borrow Patel leaves little room for doubt; he RBI Governor Raghuram Rajan continue calling them inflation doves) distortionary effects of the tax down once and for all21and it is at a target (say, 4% +2%), no such specific between Rs 5 – 10 lakhs on a is both an inflation9 as well as deficit had said that the Budget would be believe that increased aggregate system, leading people to hold more mild cost to output.”22 target exists for output, growth or per annum basis. Most farmers hawk. This is evident from the fact a key determinant of monetary demand from lower interest rates will cash, and eroding purchasing power unemployment. This is essentially 13 (65.79%) ar that he is not only the architect of policy. be matched by increased aggregate of fixed income earners especially in A transposition of what gives the government a “degree inflation targeting in India but also supply so that inflation need not the informal sector (European Central of freedom”; the inflation target can the one who paved the way for the Unlike the natural world, hawks in accelerate18, there remains some gaps Bank, nd). It is considered the “duty” macroeconomic goals be met even without recourse to high Fiscal Responsibility and Budget economics can be attacked by doves; in their arguments. What if, for of the central bank to intervene and interest rates by instead curbing the Management (FRBM) Act of 2003 the latter includes those who give argument sake, a cut in interest rate confine inflation to low and stable and instruments fiscal deficit and dampening with a 3% of GDP deficit target.10 primacy to growth and augments demand but supply (predictable) levels using interest rate Inflation hawks have slowly and aggregate demand. At the same unemployment – through lower (especially food products) lags and as the instrument. With inflation and subtly changed macroeconomic time, low interest rates would When doves dare interest rates – over inflation. In the economy experiences inflation expectations suppressed, an policy discourse through a enhance growth in real output by Let us change course from individuals recent months, we have watched this accelerating inflation? Can the efficient market system would propel transposition of goals and kick-starting or augmenting private to the underlying macroeconomics of spectacle unfold in India. Governor of the RBI then be held an economy on to a path of long- instruments. From elementary sector investment and consumption these ornithological descriptions. Subramanian Swamy, an inflation answerable for the failure to meet term growth in an environment of Keynesian theory, we know that the demand. Inflation and deficit hawks have a dove (although this ornithological the inflation target? There are two clear agenda; low and stable inflation characterization may not fit his ways for these doves to overcome that brings down inflation personal disposition), systematically this dilemma; either (i) abrogate the expectations as a precondition for undermined the arguments of the inflation target19 or (ii) pass on the low interest rates, which would, in inflation hawks, referring to their responsibility for inflation to fiscal turn, kick-start private sector theories of controlling inflation policy by constraining the investment and consequently, strong through interest rates as government to leverage its fiscal and sustainable economic growth. “outdated”14. He unconditionally space that may otherwise be utilized An expanding government sector insisted that, Rajan “was harming the to achieve broader growth and cannot bring about long lasting Indian economy by raising interest developmental objectives. With the economic progress. To the contrary, rates and making it impossible for second option, a fundamental unsustainable budget deficits are the small and medium industries to take corollary emerges; interest rate doves root cause of inflation that loans from the banks.”15 Nirmala could end up as deficit hawks when necessitates high interest rates to Sitharaman, Union Minister of State monetary policy is rule-based and The reversal in the role of instruments (inadvertently perhaps) unless they position on the inflation target and the curb private sector consumption and to achieve the goals of policy depicted are willing to question a specific (low) fiscal deficit explicit. Table & Image source for Commerce and Industry, also where the government actually investment spending, or what is exemplified the position of a typical adheres to the ‘low and stable’ in Figure 2 succinctly captures the trap inflation target. It is therefore commonly referred to as the inflation dove when she recently inflation target it has set for itself. into which interest rate doves are lured imperative for them to make their “crowding out effect”. Years before called for a drastic cut in interest becoming the Governor of the RBI, rates by 2% to boost SMEs and create When interest rate doves are not in Rajan as Chief Economist of the jobs.16 Although Sitharaman faced an favour of constraining the fiscal International Monetary Fund (IMF), immediate and adverse reaction from deficit, they must realize that more had expressed the position of deficit households who fear lower rates on than the interest rate (a number), it is hawks; savings, there is a more difficult issue the inflation target that needs to be for the doves to resolve given the debated first. But calls for relaxation India’s huge fiscal deficit, according new monetary policy framework in the inflation target will be to Rajan, is a “big problem” and it already put in place. stonewalled by the edifice of is probably “crowding out private neoliberal economics and aggression 11 sector credit”. “Inflation doves” should actually be of inflation hawks. Inflation is the

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NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY Volume I | Issue 1 • OCTOBER - NOVEMBER 2016 Volume I | Issue 1 • OCTOBER - NOVEMBER 2016

In spite of these strategic successes in Even in recent times, Rajan clearly called “interest rate doves” because dreaded bogey in the free market competition and innovation. Rajan state has two key macroeconomic institutionalizing a new monetary articulated the views of an inflation they take a firm stand on interest capitalist narrative, distorting the embodied this inflation-centric view goals - high output (growth) and a policy framework, or perhaps and deficit hawk; rates rather than on inflation per se. functioning of the price mechanism in when he told the media and analysts, low and stable inflation.23 Fiscal because of them, Rajan’s term at the A popular definition of (inflation) many ways including uncertainty over “Our [RBI’s] job is to give people policy consisting of government helm of the RBI was not renewed. Ahead of the Budget, RBI doves is provided by Investopedia: exchange rates that adversely affects confidence in the value of the rupee, expenditures and taxes, targets But even in his exit, he scored a Governor Raghuram Rajan today international capital flows, difficulty in prospects of inflation and having output, while monetary policy victory over his opponents when the warned against generating Dove refers to an economic policy for firms to distinguish changes in established that confidence, create through the instrument of interest government appointed Urjit Patel as economic growth through advisor who promotes monetary relative prices from changes in the longer-term framework to take good rate,24 targets inflation. Figure 1 the new Governor of the RBI. With additional debt [fiscal deficits] policies that involve low interest general price level so that use of decisions …”20 Another remark made below presents a schematic this decision, the government had saying that any deviation from the rates, based on the belief that low lower priced inputs may not take by him was even more definitive; representation of the assignment of indicated its desire to maintain fiscal consolidation path will hurt interest rates increase employment.17 place, rising interest rates as lenders “We must take advantage of the targets to goals. What must also be mall farmers. Majority of the continuity in Rajan’s policy initiatives. the stability of the economy.12 incur losses on capital lent and need circumstances [including low global specifically highlighted here is that farmers (82%) borrow less than Unlike many of his predecessors, While interest rate doves (we for risk premium, aggravating commodity prices] to bring inflation while there is a specific inflation Rs 5 lakhs, and 18% borrow Patel leaves little room for doubt; he RBI Governor Raghuram Rajan continue calling them inflation doves) distortionary effects of the tax down once and for all21and it is at a target (say, 4% +2%), no such specific between Rs 5 – 10 lakhs on a is both an inflation9 as well as deficit had said that the Budget would be believe that increased aggregate system, leading people to hold more mild cost to output.”22 target exists for output, growth or per annum basis. Most farmers hawk. This is evident from the fact a key determinant of monetary demand from lower interest rates will cash, and eroding purchasing power unemployment. This is essentially 13 (65.79%) ar that he is not only the architect of policy. be matched by increased aggregate of fixed income earners especially in A transposition of what gives the government a “degree inflation targeting in India but also supply so that inflation need not the informal sector (European Central of freedom”; the inflation target can the one who paved the way for the Unlike the natural world, hawks in accelerate18, there remains some gaps Bank, nd). It is considered the “duty” macroeconomic goals be met even without recourse to high Fiscal Responsibility and Budget economics can be attacked by doves; in their arguments. What if, for of the central bank to intervene and interest rates by instead curbing the Management (FRBM) Act of 2003 the latter includes those who give argument sake, a cut in interest rate confine inflation to low and stable and instruments fiscal deficit and dampening with a 3% of GDP deficit target.10 primacy to growth and augments demand but supply (predictable) levels using interest rate Inflation hawks have slowly and aggregate demand. At the same unemployment – through lower (especially food products) lags and as the instrument. With inflation and subtly changed macroeconomic time, low interest rates would When doves dare interest rates – over inflation. In the economy experiences inflation expectations suppressed, an policy discourse through a enhance growth in real output by Let us change course from individuals recent months, we have watched this accelerating inflation? Can the efficient market system would propel transposition of goals and kick-starting or augmenting private to the underlying macroeconomics of spectacle unfold in India. Governor of the RBI then be held an economy on to a path of long- instruments. From elementary sector investment and consumption these ornithological descriptions. Subramanian Swamy, an inflation answerable for the failure to meet term growth in an environment of Keynesian theory, we know that the demand. Inflation and deficit hawks have a dove (although this ornithological the inflation target? There are two clear agenda; low and stable inflation characterization may not fit his ways for these doves to overcome that brings down inflation personal disposition), systematically this dilemma; either (i) abrogate the expectations as a precondition for undermined the arguments of the inflation target19 or (ii) pass on the low interest rates, which would, in inflation hawks, referring to their responsibility for inflation to fiscal turn, kick-start private sector theories of controlling inflation policy by constraining the investment and consequently, strong through interest rates as government to leverage its fiscal and sustainable economic growth. “outdated”14. He unconditionally space that may otherwise be utilized An expanding government sector insisted that, Rajan “was harming the to achieve broader growth and cannot bring about long lasting Indian economy by raising interest developmental objectives. With the economic progress. To the contrary, rates and making it impossible for second option, a fundamental unsustainable budget deficits are the small and medium industries to take corollary emerges; interest rate doves root cause of inflation that loans from the banks.”15 Nirmala could end up as deficit hawks when necessitates high interest rates to Sitharaman, Union Minister of State monetary policy is rule-based and The reversal in the role of instruments (inadvertently perhaps) unless they position on the inflation target and the curb private sector consumption and to achieve the goals of policy depicted are willing to question a specific (low) fiscal deficit explicit. Table & Image source for Commerce and Industry, also where the government actually investment spending, or what is exemplified the position of a typical adheres to the ‘low and stable’ in Figure 2 succinctly captures the trap inflation target. It is therefore commonly referred to as the inflation dove when she recently inflation target it has set for itself. into which interest rate doves are lured imperative for them to make their “crowding out effect”. Years before called for a drastic cut in interest becoming the Governor of the RBI, rates by 2% to boost SMEs and create When interest rate doves are not in Rajan as Chief Economist of the jobs.16 Although Sitharaman faced an favour of constraining the fiscal International Monetary Fund (IMF), immediate and adverse reaction from deficit, they must realize that more had expressed the position of deficit households who fear lower rates on than the interest rate (a number), it is hawks; savings, there is a more difficult issue the inflation target that needs to be for the doves to resolve given the debated first. But calls for relaxation India’s huge fiscal deficit, according new monetary policy framework in the inflation target will be to Rajan, is a “big problem” and it already put in place. stonewalled by the edifice of is probably “crowding out private neoliberal economics and aggression 11 sector credit”. “Inflation doves” should actually be of inflation hawks. Inflation is the

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NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY Volume I | Issue 1 • OCTOBER - NOVEMBER 2016 Volume I | Issue 1 • OCTOBER - NOVEMBER 2016

To a large extent, the history of countries, not the developing world. agency said the main drag on relaxation of environmental norms, doves always easy on inflation and macroeconomics is the shift in focus Nonetheless, the preference for India’s rating is a high fiscal deficit the government is hoping to let the deficit targets? Or do they think that of macroeconomic policy from inflation control over unemployment and heavy Government private sector fuel economic growth. growth and employment can be left stabilization of output at full across different income classes borrowing.25 At the same time, it would prioritize to the private sector if interest rates employment levels to stabilization of cannot be taken for granted. spending by focusing on the supply- are kept low, which would, at the price level and inflation. Ever since The headline below is an open display side while cutting back social sector same time, keep inflation low due to the stagflation crisis of the 1970s, a The acceptable inflation rate, just as of the pressure that rating agencies spending29 to keep inflation in check. increased supply of goods and new wave of economists began the “acceptable” unemployment rate apply over macroeconomic policy: The Finance Minister, Arun Jaitley, services. In this way, tight deficit scripting a full return to free market or growth rate, is ultimately a political summarized this in an interview; targets could still be maintained or, in capitalism. Keynesian state question, a challenge that must be Fitch warns India on weak fiscal, other words, inflation doves could intervention in active management of confronted by political parties; are says may cut credit rating if deficit Now there will be a lot of public Inflation hawks do not face this still be deficit hawks. mall farmers. Majority of the the economy was seen as more of a people willing to settle for higher target not met: Last fiscal, govt spending which is going to be trilemma. Low fiscal deficits, low farmers (82%) borrow less than hindrance to sustainable growth and growth of output and employment massively cut expenditure to meet scaled down. The revenue interest rates and low inflation are Now if there are deficit hawks, there Rs 5 lakhs, and 18% borrow development than a necessity. The opportunities with more flexibility on deficit target on warnings by indications seem to be fair, so we what every hawk thinks the must be “deficit doves”. But why between Rs 5 – 10 lakhs on a new macroeconomics effectively inflation? Political parties in a rating agencies.26 are going to spend a lot more on government must strive for so that haven’t we used the term so far? The per annum basis. Most farmers altered not only the goal of democracy are sensitive to infrastructure, we are going to the private sector can do the job of term actually became prominent in (65.79%) ar macroeconomic policy but also the perceptions of people to inflation and This global trend has also taken firm spend a lot more on irrigation, we boosting growth. The first point on the aftermath of the Great Recession role of the state in managing the will be extremely cautious in taking roots in India too, which has bought are going to have a lot more the list of ten policy prescriptions in of 2008; it refers to those economists economy. First, fiscal policy was chances with a higher inflation rate, into the neoliberal view of inflation stalled projects takeoff and these the Washington Consensus like Paul Krugman and Joseph Stiglitz “proven” incapable of affecting let alone an accelerating one. At the targeting and with it, the clamour for are sectors that we are going to (Williamson, 2004) was fiscal who believe that an expansionary output and employment not just in same time, elected representatives less government and low fiscal support.30 discipline and adhering to it was seen fiscal policy and deficits are necessary the longer-term but even in the are also in a better position to judge deficits. Soon after this year’s central as the key to both, low inflation and to smooth the business cycle, but not short-term and second, attempts to the aspirations or perhaps budget, Jayant Sinha, who was An internal trilemma of avoiding a balance of payments crisis. after economic recovery. The use fiscal policy to achieve full desperation of people at the Minister of State for Finance at that The European Commission (2015) has signatories of the “Stimulus Now” employment only led to inflation. grassroots for jobs and economic time, declared: macroeconomic policy also articulated the three pillars of petition submitted to the U.S. opportunities. The decision on the With inflation targeting in place, any social and economic policy as fiscal Government unequivocally stated the But is the fear over inflation really extent of sacrifice that people are If we don’t provide that monetary move to dilute the deficit target will responsibility, structural reforms and position of deficit doves. justified, especially for a developing willing to make or can be convinced policy space by generally a tighter result in a (internal) trilemma for the investment, which together act as a country like India? It wouldn’t be out to make, must be taken by elected fiscal policy, we cannot expect government (see Figure 3). In other virtuous cycle that can ensure growth We recognize the necessity of a of place to mention, though not as representatives, which will ultimately monetary policy to loosen up … words, it cannot achieve all three and jobs. In his 2015 budget program to cut the mid- and long- proof of replicability, that during the depend on whether majority of the that is the kind of environment parameters that it would ideally hope presentation, despite postponement, term federal deficit but the two decades beginning in the 1960s, population perceive their standards we have tried to create on the for, all together - low inflation, low India’s Finance Minister underscored imperative requirement now, and 27 South Korea sustained close to of living or real wages as improving or macro side [in the Budget]. interest rates and greater fiscal space the government’s commitment to the surest course to balance the double digit annual growth rates with deteriorating. While it is true that (higher deficits). As seen earlier, it is reaching the fiscal target of 3% of budget over time, is to restore a 32 annual inflation rates between 15% under the new monetary policy The previous government was not the interest rate doves that are GDP by 2017-18 as per the FRBM full measure of economic activity. 31 and 20%. The results of more recent framework the inflation target is now necessarily different. A remark by especially prone to encounter this Act. The number itself, like the empirical studies are at best approved by the government, it is the ex-Finance Minister, P. trilemma and must explicitly state inflation target, is ultimately arbitrary The deficit doves believe that deficits tentative; while some show a being decided in a context where the Chidambaram, after presenting the which objective they are willing to and non-discretionary, and is not funded through borrowings are threshold of up to 17% before GDP fiscal deficit is increasingly being held 2013 Union Budget, makes this clear: relinquish. If private sector derived from economic theory sustainable as long as yield on growth in developing countries turns responsible as the root cause of investment were to remain sluggish (Sivramkrishna, 2015). In fact, the government debt is low; this is taken negative (Epstein, 2007), others claim inflation and has come under intense The main message to give out is along with consumption slack due to origin of the 3% deficit target (and to mean that the private sector is Table & Image source that low inflation enhances growth scrutiny of global pro-market forces. that India is following a path of a fall in nominal incomes of 60% of GDP for public debt) can be willing to lend to the government on 28 rates (Mohaddes and Raissi, 2014). Any failure to live up to its deficit fiscal prudence. households (due to lower interest traced to the European Union. easy terms. This would, however, While there can be no doubt that commitments can unleash the wrath incomes), would it be acceptable for change at some point of time when inflation hurts the poor and fixed of international rating agencies as Given this macroeconomic the government to give up on fiscal Not all birds of a the government debt needs to be income earners severely and quickly, one report categorically declared: perspective, the new monetary policy consolidation? But the government’s reined in. In pure economic terms, there still remains a larger concern framework that has bound the adherence to austerity could result in feather flock together the difference between deficit hawks which cannot be ignored; what is the International credit rating agency government to a specific inflation a significant impact on an already Our ornithological analysis of and doves is that for the latter, fiscal “acceptable” inflation rate? Is it 2%, Standard & Poor’s (S&P) on Friday target, will further push it to sluggish economy. macroeconomic policy has brought to policy is effective during crisis while 4% or 9%? Arjun Jayadev (2007), for failed to enhance the credit rating compromise its fiscal space. By the fore the interrelationship for the former, it is ineffective in instance, found that the working class on India’s sovereign debt, implementing a range of supply-side between inflation targets and deficit stimulating sustainable growth. When is more likely to prioritize combating currently just one level above structural reforms, especially of the targets. While inflation hawks are the concern is more about long-term unemployment rather than inflation. ‘junk bond’ status … What’s more, legislative kind like the land bill, usually unequivocally deficit hawks, growth than short-term stabilization, These results were, however, for S&P once again warned of a labour reforms, the goods and the position of interest rate doves the position of deficit doves would be OECD and eastern European possible ratings downgrade … the services tax (GST) reform and remain ambiguous. Are interest rate subsumed by the inflation/deficit hawks.

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NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY Volume I | Issue 1 • OCTOBER - NOVEMBER 2016 Volume I | Issue 1 • OCTOBER - NOVEMBER 2016

To a large extent, the history of countries, not the developing world. agency said the main drag on relaxation of environmental norms, doves always easy on inflation and macroeconomics is the shift in focus Nonetheless, the preference for India’s rating is a high fiscal deficit the government is hoping to let the deficit targets? Or do they think that of macroeconomic policy from inflation control over unemployment and heavy Government private sector fuel economic growth. growth and employment can be left stabilization of output at full across different income classes borrowing.25 At the same time, it would prioritize to the private sector if interest rates employment levels to stabilization of cannot be taken for granted. spending by focusing on the supply- are kept low, which would, at the price level and inflation. Ever since The headline below is an open display side while cutting back social sector same time, keep inflation low due to the stagflation crisis of the 1970s, a The acceptable inflation rate, just as of the pressure that rating agencies spending29 to keep inflation in check. increased supply of goods and new wave of economists began the “acceptable” unemployment rate apply over macroeconomic policy: The Finance Minister, Arun Jaitley, services. In this way, tight deficit scripting a full return to free market or growth rate, is ultimately a political summarized this in an interview; targets could still be maintained or, in capitalism. Keynesian state question, a challenge that must be Fitch warns India on weak fiscal, other words, inflation doves could intervention in active management of confronted by political parties; are says may cut credit rating if deficit Now there will be a lot of public Inflation hawks do not face this still be deficit hawks. mall farmers. Majority of the the economy was seen as more of a people willing to settle for higher target not met: Last fiscal, govt spending which is going to be trilemma. Low fiscal deficits, low farmers (82%) borrow less than hindrance to sustainable growth and growth of output and employment massively cut expenditure to meet scaled down. The revenue interest rates and low inflation are Now if there are deficit hawks, there Rs 5 lakhs, and 18% borrow development than a necessity. The opportunities with more flexibility on deficit target on warnings by indications seem to be fair, so we what every hawk thinks the must be “deficit doves”. But why between Rs 5 – 10 lakhs on a new macroeconomics effectively inflation? Political parties in a rating agencies.26 are going to spend a lot more on government must strive for so that haven’t we used the term so far? The per annum basis. Most farmers altered not only the goal of democracy are sensitive to infrastructure, we are going to the private sector can do the job of term actually became prominent in (65.79%) ar macroeconomic policy but also the perceptions of people to inflation and This global trend has also taken firm spend a lot more on irrigation, we boosting growth. The first point on the aftermath of the Great Recession role of the state in managing the will be extremely cautious in taking roots in India too, which has bought are going to have a lot more the list of ten policy prescriptions in of 2008; it refers to those economists economy. First, fiscal policy was chances with a higher inflation rate, into the neoliberal view of inflation stalled projects takeoff and these the Washington Consensus like Paul Krugman and Joseph Stiglitz “proven” incapable of affecting let alone an accelerating one. At the targeting and with it, the clamour for are sectors that we are going to (Williamson, 2004) was fiscal who believe that an expansionary output and employment not just in same time, elected representatives less government and low fiscal support.30 discipline and adhering to it was seen fiscal policy and deficits are necessary the longer-term but even in the are also in a better position to judge deficits. Soon after this year’s central as the key to both, low inflation and to smooth the business cycle, but not short-term and second, attempts to the aspirations or perhaps budget, Jayant Sinha, who was An internal trilemma of avoiding a balance of payments crisis. after economic recovery. The use fiscal policy to achieve full desperation of people at the Minister of State for Finance at that The European Commission (2015) has signatories of the “Stimulus Now” employment only led to inflation. grassroots for jobs and economic time, declared: macroeconomic policy also articulated the three pillars of petition submitted to the U.S. opportunities. The decision on the With inflation targeting in place, any social and economic policy as fiscal Government unequivocally stated the But is the fear over inflation really extent of sacrifice that people are If we don’t provide that monetary move to dilute the deficit target will responsibility, structural reforms and position of deficit doves. justified, especially for a developing willing to make or can be convinced policy space by generally a tighter result in a (internal) trilemma for the investment, which together act as a country like India? It wouldn’t be out to make, must be taken by elected fiscal policy, we cannot expect government (see Figure 3). In other virtuous cycle that can ensure growth We recognize the necessity of a of place to mention, though not as representatives, which will ultimately monetary policy to loosen up … words, it cannot achieve all three and jobs. In his 2015 budget program to cut the mid- and long- proof of replicability, that during the depend on whether majority of the that is the kind of environment parameters that it would ideally hope presentation, despite postponement, term federal deficit but the two decades beginning in the 1960s, population perceive their standards we have tried to create on the for, all together - low inflation, low India’s Finance Minister underscored imperative requirement now, and 27 South Korea sustained close to of living or real wages as improving or macro side [in the Budget]. interest rates and greater fiscal space the government’s commitment to the surest course to balance the double digit annual growth rates with deteriorating. While it is true that (higher deficits). As seen earlier, it is reaching the fiscal target of 3% of budget over time, is to restore a 32 annual inflation rates between 15% under the new monetary policy The previous government was not the interest rate doves that are GDP by 2017-18 as per the FRBM full measure of economic activity. 31 and 20%. The results of more recent framework the inflation target is now necessarily different. A remark by especially prone to encounter this Act. The number itself, like the empirical studies are at best approved by the government, it is the ex-Finance Minister, P. trilemma and must explicitly state inflation target, is ultimately arbitrary The deficit doves believe that deficits tentative; while some show a being decided in a context where the Chidambaram, after presenting the which objective they are willing to and non-discretionary, and is not funded through borrowings are threshold of up to 17% before GDP fiscal deficit is increasingly being held 2013 Union Budget, makes this clear: relinquish. If private sector derived from economic theory sustainable as long as yield on growth in developing countries turns responsible as the root cause of investment were to remain sluggish (Sivramkrishna, 2015). In fact, the government debt is low; this is taken negative (Epstein, 2007), others claim inflation and has come under intense The main message to give out is along with consumption slack due to origin of the 3% deficit target (and to mean that the private sector is Table & Image source that low inflation enhances growth scrutiny of global pro-market forces. that India is following a path of a fall in nominal incomes of 60% of GDP for public debt) can be willing to lend to the government on 28 rates (Mohaddes and Raissi, 2014). Any failure to live up to its deficit fiscal prudence. households (due to lower interest traced to the European Union. easy terms. This would, however, While there can be no doubt that commitments can unleash the wrath incomes), would it be acceptable for change at some point of time when inflation hurts the poor and fixed of international rating agencies as Given this macroeconomic the government to give up on fiscal Not all birds of a the government debt needs to be income earners severely and quickly, one report categorically declared: perspective, the new monetary policy consolidation? But the government’s reined in. In pure economic terms, there still remains a larger concern framework that has bound the adherence to austerity could result in feather flock together the difference between deficit hawks which cannot be ignored; what is the International credit rating agency government to a specific inflation a significant impact on an already Our ornithological analysis of and doves is that for the latter, fiscal “acceptable” inflation rate? Is it 2%, Standard & Poor’s (S&P) on Friday target, will further push it to sluggish economy. macroeconomic policy has brought to policy is effective during crisis while 4% or 9%? Arjun Jayadev (2007), for failed to enhance the credit rating compromise its fiscal space. By the fore the interrelationship for the former, it is ineffective in instance, found that the working class on India’s sovereign debt, implementing a range of supply-side between inflation targets and deficit stimulating sustainable growth. When is more likely to prioritize combating currently just one level above structural reforms, especially of the targets. While inflation hawks are the concern is more about long-term unemployment rather than inflation. ‘junk bond’ status … What’s more, legislative kind like the land bill, usually unequivocally deficit hawks, growth than short-term stabilization, These results were, however, for S&P once again warned of a labour reforms, the goods and the position of interest rate doves the position of deficit doves would be OECD and eastern European possible ratings downgrade … the services tax (GST) reform and remain ambiguous. Are interest rate subsumed by the inflation/deficit hawks.

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The worldview of the depressions, MMT does raise do not draw up a budget, when the state but at the same time, MMT also recognizes that money is sufficiently high levels, excessive important questions on they do it, it is just about tallying financial assets of the private sector. hierarchical and its total supply is credit demand may lead to a breach owls macroeconomics as disseminated by up income and expenditure items. If we begin with the fundamental endogenous (McLeay et al, 2014). A in the inflation target or else, fiscal Owls are known for their capability to textbooks and in particular, the There are not too many sources of macroeconomic accounting identity: significant portion of money creation policy will have to reverse course. It rotate their heads to get an almost financial space available to the state. the former and there are too happens by commercial banks; is true that tax revenues act as an 360 degree view; macroeconomic many claims on the latter side. S + T + M = I + G + X reserve money (created by the automatic stabilizer so that as Hence, for families, it is mostly or central bank) is however required for government spending and incomes owls are no different. First, let me An exploration of MMT is beyond the about prioritisation, (S – I) = (G – T) + (X – M) inter-bank settlements. While the rise, so will tax revenues (for any dispense with the term “inflation scope of this paper; however, we postponement and discipline. central bank is obliged to provide given tax rate). This will partially owl” that gained traction in India briefly discuss some of its important then for a country with current adequate reserve money to the drain out reserve money from the when Rajan remarked that “we are tenets to introduce the reader to the Most of these considerations account deficits (i.e. X – M < 0), for commercial banks, the former can system. The question, however, is neither doves nor hawks … but fundamental differences in the mall farmers. Majority of the 33 apply to institutions, corporations private net savings (S – I > 0), we control the price at which this is whether this will be adequate to owls.” Using owls as a symbol of perspective of “deficit owls”. Drawing farmers (82%) borrow less than and to sovereigns. The first two, in must have G – T > 0, i.e. budget made available through the repo rate. contain inflation. If not, monetary wisdom, Rajan was not comfortable upon Abba P. Lerner’s theory of Rs 5 lakhs, and 18% borrow most cases, have the ability to deficits. It is important to understand Government spending puts state policy can do the job. with the labelling of his stand as functional finance, the objective of between Rs 5 – 10 lakhs on a borrow more than individuals that although net private sector money (reserve money) into hawkish. The term “owl” was, the fiscal policy must be full per annum basis. Most farmers have. A sovereign state has the savings may be negative in the short- circulation while taxes and the sale of In the context of growth and however, used long before Rajan by employment. The government must, (65.79%) ar ability to levy taxes and hence, has run, they cannot be sustained bonds by the central bank drain development, from an MMT Richard Fisher of the Federal Reserve therefore, spend adequately to reach more leeway on expenditure than indefinitely. Only the state can reserves from the system. In other perspective, economists must not Bank of Dallas in a speech delivered full employment, especially when the households, corporations or sustain liabilities indefinitely. It words, when the government spends only question the need for strict in early 2008. economy is operating at levels with institutions have (Asher et al, should be of no surprise that India (injects reserve money into the numerical fiscal deficit targets but significant surplus capacity. With 2014). has never had a budget surplus since banking system) to achieve its growth also debate the inflation target … I like neither the term “hawk” inadequate government spending Independence. Even the US has run objectives, the central bank drains number, politically. This is the nor “dove.” I like to think that all due to fiscal discipline, the economy Such a flawed understanding of how surpluses rarely, and not for an excess liquidity (the injected fundamental attribute of deficit and FOMC members are best could experience an immediate the macro economy works actually extended period of time. reserves) from the system through inflation owls. metaphorically described in slowdown resulting in weak tax finds wide publicity in the media. open market operations and by ornithological terms as revenues. The inability to meet fiscal Commentators and even experts We must be careful in understanding providing liquidity (reserve money) to “owls”—wise women and men targets would set the vicious circle of Free birds? seeking to achieve the right begin to repeat the same argument the MMT argument; while it the commercial banking system at austerity policy in motion; cuts in An ornithological overview of balance in carrying out our dual without ever questioning where postulates that there are no the stipulated repo rate. expenditure, slow growth, lower tax macroeconomic discourse is [inflation and employment] these ideas come from. The budgetary constraints on a Furthermore, the reverse repo rate, revenues and inability to meet deficit presented in Figure 4. While there is mandate.34 proposition that the government government, it does not mean that i.e. the rate at which commercial targets. It is, therefore, not surprising clarity emerging in the position of the needs our money to spend is an unlimited supply will not have banks can park excess liquidity with that the world has begun questioning owls and hawks, this cannot be said Going by Fisher’s definition, inflation 35 incorrect, at the very core. This is adverse effects on an economy. the central bank, effectively increases the logic of austerity. In India too, about the interest rate doves; more targeting contradicts what owls stand true even of mainstream economics Inflation and depreciation of the the opportunity cost of lending prior to the central budget earlier this importantly, the latter is where most for. Let me, therefore, define an where a government budget domestic currency vis-à-vis foreign against excess reserves held by year, industry had in fact asked the politicians and political inflation owl as one who leaves it to constraint (GBC) is incorporated into currencies could indeed be the commercial banks. This, in turn, government to stop fixating on the commentators find themselves and elected representatives to decide on DSGE (dynamic stochastic general outcomes of issuing state money, dampens private sector credit deficit and spend more to kick start therefore, need to articulate their an appropriate inflation rate and 36 equilibrium) models. As Wray puts it, especially when the economy is demand for investment and the investment cycle. There are choice on inflation and deficits. already operating at full employment consumption, thereby suppressing make a choice between inflation and growing calls for fiscal stimulus now …so long as state liabilities are levels. Nonetheless, these aspects imminent inflationary pressures. If growth (or employment) rates based given the slow progress in structural 37 demanded, they can be supplied should not be conflated into GBC. interest rates are not set at on ground realities. reforms. by the state (central bank plus treasury) in its spending (and Table & Image source Coming to fiscal deficits, the At the core of MMT is the way we lending). There is no limited “opposite” ends of the deficit look at the state and its financial supply of either private38 or state spectrum do not belong to hawks and constraints; as a monopoly issuer of IOUs—so long as either is willing doves, but to hawks and doves on state money, the government does to issue IOUs, they can be one side and the “deficit owls” on the not face a budget constraint like supplied. The problem, as Minsky other. The term “deficit owl” must be households or firms as is often said, is to get them accepted. In attributed to Stephanie Kelton of the assumed. Many economic other words, the limit is on the University of Missouri at Kansas City commentators wrongly make this demand side.” (Wray, 2014, p. 28). (UMKC) from where a relatively new assumption and then go out to draw but provoking post-Keynesian prescriptions from their study. macroeconomics has emerged - Deficit owls do not think deficit numbers are a problem per se, in the Modern Money Theory (MMT). For families, a budget is a short or in the long-term. Moreover, Although specifically relevant to the statement of income and government deficits are a liability of context of recessions and expenditure. Even though many

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The worldview of the depressions, MMT does raise do not draw up a budget, when the state but at the same time, MMT also recognizes that money is sufficiently high levels, excessive important questions on they do it, it is just about tallying financial assets of the private sector. hierarchical and its total supply is credit demand may lead to a breach owls macroeconomics as disseminated by up income and expenditure items. If we begin with the fundamental endogenous (McLeay et al, 2014). A in the inflation target or else, fiscal Owls are known for their capability to textbooks and in particular, the There are not too many sources of macroeconomic accounting identity: significant portion of money creation policy will have to reverse course. It rotate their heads to get an almost financial space available to the state. the former and there are too happens by commercial banks; is true that tax revenues act as an 360 degree view; macroeconomic many claims on the latter side. S + T + M = I + G + X reserve money (created by the automatic stabilizer so that as Hence, for families, it is mostly or central bank) is however required for government spending and incomes owls are no different. First, let me An exploration of MMT is beyond the about prioritisation, (S – I) = (G – T) + (X – M) inter-bank settlements. While the rise, so will tax revenues (for any dispense with the term “inflation scope of this paper; however, we postponement and discipline. central bank is obliged to provide given tax rate). This will partially owl” that gained traction in India briefly discuss some of its important then for a country with current adequate reserve money to the drain out reserve money from the when Rajan remarked that “we are tenets to introduce the reader to the Most of these considerations account deficits (i.e. X – M < 0), for commercial banks, the former can system. The question, however, is neither doves nor hawks … but fundamental differences in the mall farmers. Majority of the 33 apply to institutions, corporations private net savings (S – I > 0), we control the price at which this is whether this will be adequate to owls.” Using owls as a symbol of perspective of “deficit owls”. Drawing farmers (82%) borrow less than and to sovereigns. The first two, in must have G – T > 0, i.e. budget made available through the repo rate. contain inflation. If not, monetary wisdom, Rajan was not comfortable upon Abba P. Lerner’s theory of Rs 5 lakhs, and 18% borrow most cases, have the ability to deficits. It is important to understand Government spending puts state policy can do the job. with the labelling of his stand as functional finance, the objective of between Rs 5 – 10 lakhs on a borrow more than individuals that although net private sector money (reserve money) into hawkish. The term “owl” was, the fiscal policy must be full per annum basis. Most farmers have. A sovereign state has the savings may be negative in the short- circulation while taxes and the sale of In the context of growth and however, used long before Rajan by employment. The government must, (65.79%) ar ability to levy taxes and hence, has run, they cannot be sustained bonds by the central bank drain development, from an MMT Richard Fisher of the Federal Reserve therefore, spend adequately to reach more leeway on expenditure than indefinitely. Only the state can reserves from the system. In other perspective, economists must not Bank of Dallas in a speech delivered full employment, especially when the households, corporations or sustain liabilities indefinitely. It words, when the government spends only question the need for strict in early 2008. economy is operating at levels with institutions have (Asher et al, should be of no surprise that India (injects reserve money into the numerical fiscal deficit targets but significant surplus capacity. With 2014). has never had a budget surplus since banking system) to achieve its growth also debate the inflation target … I like neither the term “hawk” inadequate government spending Independence. Even the US has run objectives, the central bank drains number, politically. This is the nor “dove.” I like to think that all due to fiscal discipline, the economy Such a flawed understanding of how surpluses rarely, and not for an excess liquidity (the injected fundamental attribute of deficit and FOMC members are best could experience an immediate the macro economy works actually extended period of time. reserves) from the system through inflation owls. metaphorically described in slowdown resulting in weak tax finds wide publicity in the media. open market operations and by ornithological terms as revenues. The inability to meet fiscal Commentators and even experts We must be careful in understanding providing liquidity (reserve money) to “owls”—wise women and men targets would set the vicious circle of Free birds? seeking to achieve the right begin to repeat the same argument the MMT argument; while it the commercial banking system at austerity policy in motion; cuts in An ornithological overview of balance in carrying out our dual without ever questioning where postulates that there are no the stipulated repo rate. expenditure, slow growth, lower tax macroeconomic discourse is [inflation and employment] these ideas come from. The budgetary constraints on a Furthermore, the reverse repo rate, revenues and inability to meet deficit presented in Figure 4. While there is mandate.34 proposition that the government government, it does not mean that i.e. the rate at which commercial targets. It is, therefore, not surprising clarity emerging in the position of the needs our money to spend is an unlimited supply will not have banks can park excess liquidity with that the world has begun questioning owls and hawks, this cannot be said Going by Fisher’s definition, inflation 35 incorrect, at the very core. This is adverse effects on an economy. the central bank, effectively increases the logic of austerity. In India too, about the interest rate doves; more targeting contradicts what owls stand true even of mainstream economics Inflation and depreciation of the the opportunity cost of lending prior to the central budget earlier this importantly, the latter is where most for. Let me, therefore, define an where a government budget domestic currency vis-à-vis foreign against excess reserves held by year, industry had in fact asked the politicians and political inflation owl as one who leaves it to constraint (GBC) is incorporated into currencies could indeed be the commercial banks. This, in turn, government to stop fixating on the commentators find themselves and elected representatives to decide on DSGE (dynamic stochastic general outcomes of issuing state money, dampens private sector credit deficit and spend more to kick start therefore, need to articulate their an appropriate inflation rate and 36 equilibrium) models. As Wray puts it, especially when the economy is demand for investment and the investment cycle. There are choice on inflation and deficits. already operating at full employment consumption, thereby suppressing make a choice between inflation and growing calls for fiscal stimulus now …so long as state liabilities are levels. Nonetheless, these aspects imminent inflationary pressures. If growth (or employment) rates based given the slow progress in structural 37 demanded, they can be supplied should not be conflated into GBC. interest rates are not set at on ground realities. reforms. by the state (central bank plus treasury) in its spending (and Table & Image source Coming to fiscal deficits, the At the core of MMT is the way we lending). There is no limited “opposite” ends of the deficit look at the state and its financial supply of either private38 or state spectrum do not belong to hawks and constraints; as a monopoly issuer of IOUs—so long as either is willing doves, but to hawks and doves on state money, the government does to issue IOUs, they can be one side and the “deficit owls” on the not face a budget constraint like supplied. The problem, as Minsky other. The term “deficit owl” must be households or firms as is often said, is to get them accepted. In attributed to Stephanie Kelton of the assumed. Many economic other words, the limit is on the University of Missouri at Kansas City commentators wrongly make this demand side.” (Wray, 2014, p. 28). (UMKC) from where a relatively new assumption and then go out to draw but provoking post-Keynesian prescriptions from their study. macroeconomics has emerged - Deficit owls do not think deficit numbers are a problem per se, in the Modern Money Theory (MMT). For families, a budget is a short or in the long-term. Moreover, Although specifically relevant to the statement of income and government deficits are a liability of context of recessions and expenditure. Even though many

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• Asher, M., V. Anantha Nageswaran and Narayan Ramachandran (2014), Grasping the Nettle: Fiscal Consolidation is the Key to Economic Growth, Discussion Document, Takshashila Institution, http://takshashila.org.in/syndicated- general/discussion-document-fiscal-consolidation-is-the-key-to-economic-growth/ (accessed on 25 July 2016). • Epstein, Gerald (2007), Central Banks, Inflation Targeting and Employment Creation, International Labor Organization, 2007, http://www.ilo.org/public/english/employment/download/elm/elm07-2.pdf (accessed on September 1, 2016). • European Central Bank (nd), Price Stability: Why is it Important for you? https://www.ecb.europa.eu/ mall farmers. Majority of the pub/pdf/other/whypricestabilityen.pdf (accessed on August 23, 2016) farmers (82%) borrow less than • European Commission (2015), EU Annual Growth Survey 2015: A new Momentum for Jobs, Growth and Investment, Rs 5 lakhs, and 18% borrow http://europa.eu/rapid/press-release_IP-14-2235_en.htm (accessed on August 31, 2016). between Rs 5 – 10 lakhs on a • Jayadev, Arjun (2007), The Class Content of Preferences towards Anti-Inflation and Anti-Unemployment Policies, per annum basis. Most farmers University of Massachusetts Boston, Economics Faculty Publication Series, (65.79%) ar http://scholarworks.umb.edu/cgi/viewcontent.cgi?article=1004&context=econ_faculty_pubs (accessed on July 30, 2016) • McLeay, Michael, Amar Radia and Ryland Thomas (2014), Money Creation in a Modern Economy, Bank of England, Quarterly Bulletin 2014 Q1, http://www.bankofengland.co.uk/publications/Documents/ quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf (accessed on 13 May 2016).

Economists, however, need to attention on governance and raising functioning of the MPC. Meanwhile, • Mohaddes, Kamiar and Mehdi Raissi (2014), Does Inflation Slow Long-Run Growth in India? International Monetary understand that India, unlike Greece output and productive capacity of the more than discussions on Fund, Working Paper WP/14/222, https://www.imf.org/external/pubs/ft/ wp/2014/wp14222.pdf (accessed on August or Spain, is an economically sovereign nation so that the long-term instruments and target numbers, we 11, 2016). country issuing its own fiat currency. objectives of macroeconomic policy need to refocus greater attention on • Sivramkrishna, Sashi (2015), Decentring Fiscal Deficit Target Numbers, Economic & Political Weekly, 50(19), May. The Indian government must realize are realized. But some acceleration the larger goals of macroeconomics • Williamson, John (2004), The Washington Consensus as Policy Prescription for Development, that it is not constrained by the want in inflation rates – in particular, food policy and in particular, employment http://www.iie.com/publications/papers/williamson0204.pdf (accessed on August 8, 2016). of revenues. Compromising on inflation – at least in the short-run, is rather than inflation alone. critical issues like education, health, an imminent possibility; will the • Wray, Randall L (2014), From the State Theory of Money to Modern Money Theory: An Alternative to Economic food security and employment government be willing to relax the Economic birds are not free. They are Orthodoxy, Working Paper No. 792, Levy Economics Institute of Bard College, generation in order to achieve fiscal inflation and deficit targets in favour chained to specific viewpoints about http://www.levyinstitute.org/pubs/wp_792.pdf (accessed on 20 June 2016). deficit target numbers may prove to of growth? Or will they stick to a how the macro economy works. To be an unjustifiable obsession. While neoliberal stand that once inflation is set themselves free, economists must the Indian state cannot face a threat under control, the market system and open up debate with other paradigms 1 of bankruptcy, it could face the private sector will do the job? The and question their “beliefs” of how Reddy Reckoner, Hindustan Times, July 28, 2006 (accessed on August 30, 2016), danger of inflation and a depreciating appointment of Urjit Patel seems to the market system works and how to http://www.hindustantimes.com/india/reddy-reckoner/story-SYhsaZsfrWsogZY7RDDmNM.html rupee; it is therefore imperative that suggest that neoliberal policies have set it right. 2 Kalyan Ram and Aabhas Pandya, Baby steps to half steps leaves doves fuming, hawks craving, DNA, July 28, 2010 any increased government taken root in India but we must wait (accessed on August 31, 2016), http://www.dnaindia.com/money/report-baby-steps-to-half-step-leaves-doves-fuming- expenditure comes with greater and watch the composition and hawks-craving-1415624 3 Tamal Bandyopadhyay, Subbarao takes the middle path, Livemint, September 17, 2012 (accessed on August 31, 2016), Table & Image source http://www.livemint.com/Opinion/3qM0MxAJhH2lCBfhzZwCLJ/Bankers-Trust-Path-of-moderation.html 4 Govt sets inflation target of 4%, a victory for Raghuram Rajan, Huffington Post, August 5, 2016 (accessed on September 3, 0216), http://www.huffingtonpost.in/2016/08/05/govt-sets-inflation-target-of-4-a-victory-for-raghuram-rajan/ 5 Tamal Bandyopadhyay, RBI at risk of losing autonomy, Livemint, July 25, 2015 (accessed on August 9, 2016), http://www.livemint.com/Opinion/XqI2cp1RYLVjeXlWssjpvJ/RBI-at-risk-of-losingautonomy.html 6 See for instance,Vivek Dehejia and Rajeswari Sengupta, In defence of the financial code, Livemint, July 28, 2015 (accessed on August 8, 2016), http://www.livemint.com/Opinion/VF8XjPZiGeIXimelsBSsTL/In-defence-of-the-financial- code.html Sanhita Sapatnekar and Mohit Desai, MPC: Many is better than one, Livemint, August 5, 2015 (accessed on August 3, 2016), http://www.livemint.com/Opinion/hvuNoWua1ZmMeJE9GOAKpK/MPC-Many-is-better-than-one.html Vishwanath Nair, Govt, RBI on the same page on monetary policy panel issue, says Rajan, August 5, 2015 (accessed on August 1, 2016), http://www.livemint.com/Politics/rmzV3n2t3062dRa2wXF6HI/Rajan-says-RBI-govt-in-broad- agreement-on-monetary-policy-c.html

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NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY Volume I | Issue 1 • OCTOBER - NOVEMBER 2016 Volume I | Issue 1 • OCTOBER - NOVEMBER 2016 References

• Asher, M., V. Anantha Nageswaran and Narayan Ramachandran (2014), Grasping the Nettle: Fiscal Consolidation is the Key to Economic Growth, Discussion Document, Takshashila Institution, http://takshashila.org.in/syndicated- general/discussion-document-fiscal-consolidation-is-the-key-to-economic-growth/ (accessed on 25 July 2016). • Epstein, Gerald (2007), Central Banks, Inflation Targeting and Employment Creation, International Labor Organization, 2007, http://www.ilo.org/public/english/employment/download/elm/elm07-2.pdf (accessed on September 1, 2016). • European Central Bank (nd), Price Stability: Why is it Important for you? https://www.ecb.europa.eu/ mall farmers. Majority of the pub/pdf/other/whypricestabilityen.pdf (accessed on August 23, 2016) farmers (82%) borrow less than • European Commission (2015), EU Annual Growth Survey 2015: A new Momentum for Jobs, Growth and Investment, Rs 5 lakhs, and 18% borrow http://europa.eu/rapid/press-release_IP-14-2235_en.htm (accessed on August 31, 2016). between Rs 5 – 10 lakhs on a • Jayadev, Arjun (2007), The Class Content of Preferences towards Anti-Inflation and Anti-Unemployment Policies, per annum basis. Most farmers University of Massachusetts Boston, Economics Faculty Publication Series, (65.79%) ar http://scholarworks.umb.edu/cgi/viewcontent.cgi?article=1004&context=econ_faculty_pubs (accessed on July 30, 2016) • McLeay, Michael, Amar Radia and Ryland Thomas (2014), Money Creation in a Modern Economy, Bank of England, Quarterly Bulletin 2014 Q1, http://www.bankofengland.co.uk/publications/Documents/ quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf (accessed on 13 May 2016).

Economists, however, need to attention on governance and raising functioning of the MPC. Meanwhile, • Mohaddes, Kamiar and Mehdi Raissi (2014), Does Inflation Slow Long-Run Growth in India? International Monetary understand that India, unlike Greece output and productive capacity of the more than discussions on Fund, Working Paper WP/14/222, https://www.imf.org/external/pubs/ft/ wp/2014/wp14222.pdf (accessed on August or Spain, is an economically sovereign nation so that the long-term instruments and target numbers, we 11, 2016). country issuing its own fiat currency. objectives of macroeconomic policy need to refocus greater attention on • Sivramkrishna, Sashi (2015), Decentring Fiscal Deficit Target Numbers, Economic & Political Weekly, 50(19), May. The Indian government must realize are realized. But some acceleration the larger goals of macroeconomics • Williamson, John (2004), The Washington Consensus as Policy Prescription for Development, that it is not constrained by the want in inflation rates – in particular, food policy and in particular, employment http://www.iie.com/publications/papers/williamson0204.pdf (accessed on August 8, 2016). of revenues. Compromising on inflation – at least in the short-run, is rather than inflation alone. critical issues like education, health, an imminent possibility; will the • Wray, Randall L (2014), From the State Theory of Money to Modern Money Theory: An Alternative to Economic food security and employment government be willing to relax the Economic birds are not free. They are Orthodoxy, Working Paper No. 792, Levy Economics Institute of Bard College, generation in order to achieve fiscal inflation and deficit targets in favour chained to specific viewpoints about http://www.levyinstitute.org/pubs/wp_792.pdf (accessed on 20 June 2016). deficit target numbers may prove to of growth? Or will they stick to a how the macro economy works. To be an unjustifiable obsession. While neoliberal stand that once inflation is set themselves free, economists must the Indian state cannot face a threat under control, the market system and open up debate with other paradigms 1 of bankruptcy, it could face the private sector will do the job? The and question their “beliefs” of how Reddy Reckoner, Hindustan Times, July 28, 2006 (accessed on August 30, 2016), danger of inflation and a depreciating appointment of Urjit Patel seems to the market system works and how to http://www.hindustantimes.com/india/reddy-reckoner/story-SYhsaZsfrWsogZY7RDDmNM.html rupee; it is therefore imperative that suggest that neoliberal policies have set it right. 2 Kalyan Ram and Aabhas Pandya, Baby steps to half steps leaves doves fuming, hawks craving, DNA, July 28, 2010 any increased government taken root in India but we must wait (accessed on August 31, 2016), http://www.dnaindia.com/money/report-baby-steps-to-half-step-leaves-doves-fuming- expenditure comes with greater and watch the composition and hawks-craving-1415624 3 Tamal Bandyopadhyay, Subbarao takes the middle path, Livemint, September 17, 2012 (accessed on August 31, 2016), Table & Image source http://www.livemint.com/Opinion/3qM0MxAJhH2lCBfhzZwCLJ/Bankers-Trust-Path-of-moderation.html 4 Govt sets inflation target of 4%, a victory for Raghuram Rajan, Huffington Post, August 5, 2016 (accessed on September 3, 0216), http://www.huffingtonpost.in/2016/08/05/govt-sets-inflation-target-of-4-a-victory-for-raghuram-rajan/ 5 Tamal Bandyopadhyay, RBI at risk of losing autonomy, Livemint, July 25, 2015 (accessed on August 9, 2016), http://www.livemint.com/Opinion/XqI2cp1RYLVjeXlWssjpvJ/RBI-at-risk-of-losingautonomy.html 6 See for instance,Vivek Dehejia and Rajeswari Sengupta, In defence of the financial code, Livemint, July 28, 2015 (accessed on August 8, 2016), http://www.livemint.com/Opinion/VF8XjPZiGeIXimelsBSsTL/In-defence-of-the-financial- code.html Sanhita Sapatnekar and Mohit Desai, MPC: Many is better than one, Livemint, August 5, 2015 (accessed on August 3, 2016), http://www.livemint.com/Opinion/hvuNoWua1ZmMeJE9GOAKpK/MPC-Many-is-better-than-one.html Vishwanath Nair, Govt, RBI on the same page on monetary policy panel issue, says Rajan, August 5, 2015 (accessed on August 1, 2016), http://www.livemint.com/Politics/rmzV3n2t3062dRa2wXF6HI/Rajan-says-RBI-govt-in-broad- agreement-on-monetary-policy-c.html

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NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY Volume I | Issue 1 • OCTOBER - NOVEMBER 2016 Volume I | Issue 1 • OCTOBER - NOVEMBER 2016

7 Ami Shah and Ira Dugla, Raghuram Rajan leaves unfinished business at RBI, Livemint, June 20, 2016 (accessed on August 28 As it happened: Chidambaram focuses on fiscal deficit, Firstpost, February 28, 2013 (accessed on September 9, 0216), 14, 2016), http://www.livemint.com/Politics/Uw5AMLZ8sY5BtDdGbC63LN/Banks-cleanup-MPC-top-Rajans-unfinished- http://www.firstpost.com/investing/budget-2013-as-it-happened-chidambaram-focuses-on-fiscal-deficit-642856.html tasks.html 29 See for instance, Manas Chakravarty, Government spending: numbers don’t lie, Livemint, June 1, 2015 (accessed on 8 The Reserve Bank’s ability to say “No!” has to be protected: Raghuram Rajan, Scroll.in, September 3, 2016 (accessed on August 4, 2016), http://www.livemint.com/Opinion/VpODtln8lv3dEF9C8bYdUP/Government-spending-Numbers-dont- September 14, 2016), http://scroll.in/article/815619/the-reserve-banks-ability-to-say-no-has-to-be-protected-raghuram- lie.html. After uproar, India ups budget for some social welfare sectors, Reuters, July 31, 2015 (accessed on August 4, rajan (emphasis in italics is my own). 2016), http://in.reuters.com/article/2015/07/31/india-budget-idINKCN0Q51DY20150731. Aditya Kalra and Andrew 9 The recent interest rate cut on October 4, 2016, by the Reserve Bank of India has, however, led many economists and experts Macaskill, Roads before welfare: Modi faces dissent over spending shakeup, Reuters, May 19, 2015 (accessed on August to believe that Urjit Patel is turning dovish on inflation. 3, 2016), http://in.reuters.com/article/2015/05/19/india-modi-insight-idINKBN0O328W20150519 30 10 Mayur Shetty and Surojit Gupta, Man with a target: inflation and the fisc, Times of India, August 26, 2016 (accessed on Nayantara Rai, Jaitley hopes to meet GST deadline, expects Congress would ‘return to the table’, F. Business, August 7, August 30, 2016), http://timesofindia.indiatimes.com/business/india-business/Man-with-a-target-Inflation-and-the- 2015 (accessed on September 4, 2016), http://www.firstpost.com/business/jaitley-hopes-to-gst-deadline-expects- mall farmers. Majority of the fisc/articleshow/53802014.cms congress-would-return-to-the-table-2381980.html farmers (82%) borrow less than 31 11 Manas Chakraborty and Tamal Bandyopadhyay, Speed up reforms: Raghuram Rajan, Business Standard, September 6, Union Budget 2015-16: Fiscal deficit pegged at 3.9%, to reach 3% by FY’18, Business Today, February 28, 2015 (accessed Rs 5 lakhs, and 18% borrow 2003 (accessed on September 7, 2016), http://www.business-standard.com/article/finance/speed-up-reforms-rajan- on September 13, 2016), http://www.businesstoday.in/union-budget-2015-16/key-announcements/ union-budget- between Rs 5 – 10 lakhs on a 103090601072_1.html 2015-16-modi-govt-fiscal-deficit-target/story/216285.html per annum basis. Most farmers 32 12 Reboot America, The Daily Beast, July 19, 2010 (accessed on September 10, 2016), (65.79%) ar Raghuram Rajan warns against fiscal deficit driven growth, DNA, January 30, 2016 (accessed on September 7, 2016), http://www.dnaindia.com/money/report-raghuram-rajan-warns-against-fiscal-deficit-driven-growth-2171864 http://www.thedailybeast.com/articles/2010/07/19/save-the-economy-a-manifesto-by-harry-evans-joseph-stiglitz-alan- blinder-and-other-leaders.html 13 Budget 2016, Economic Times, March 4, 2016 (accessed on September 7, 2016), 33 http://economictimes.indiatimes.com/news/economy/policy/budget-2016-fiscal-policy-puts-ball-in-raghuram-rajans- RBI a vigilant owl, not a dove or a hawk: Raghuram Rajan, Economic Times, January 28, 2014 (accessed on August 31, court-now-says-jayant-sinha/articleshow/51247568.cms 2016), http://articles.economictimes.indiatimes.com/2014-01-28/news/46735215_1_governor-raghuram-rajan-doves- vigilant 14 Vrishti Beniwal, Subramanian Swamy hails Rajan exit as liberation for India economy, Livemint, June 21, 2016 (accessed 34 on August 31, 2016), http://www.livemint.com/Politics/ilbOrN2src4XgOGeqkfPqK/Subramanian-Swamy-sees-India- http://www.dallasfed.org/news/speeches/fisher/2008/fs080117.cfm growth-unchained-now-that-Raghu.html 35 See for instance, Mariana Mazzucato, Austerity is the cause of our economic woes. It’s nothing to do with EU, The 15 ‘Rajan was harming the economy’: Swamy fires fresh salvo at RBI chief, The Hindustan Times, August 7, 2016 (accessed Guardian, June 27, 2016 (accessed on August 31, 2016), on September 3, 2016), http://www.hindustantimes.com/india-news/markets-not-collapsing-but-to-go-up-as-rajan- https://www.theguardian.com/commentisfree/2016/jun/27/austerity-economic-woes-eu-referendum-brexit exits-swamy-hits-out-at-rbi-chief/story-16mQ2HQBtm2ki8Q9T7av5H.html 36 Ashok Malik, Measures by Narendra Modi can beget proper economic reforms, Economic Times, April 21, 2015, 16 2% rate cut necessary to boost SMEs, create jobs: Nirmala Sitharaman, Times of India, August 27, 2016 (accessed on http://articles.economictimes.indiatimes.com/2015-04-21/news/61378928_1_modi-government-government- August 31, 2016), http://timesofindia.indiatimes.com/business/india-business/2-rate-cut-necessary-to-boost-SMEs- spending-narendra-modi create-jobs-Nirmala-Sitharaman/articleshow/53887610.cms 37 The case for a fiscal push in India, Livemint, 7.08.2015, http://www.livemint.com/Opinion/ 17 http://www.investopedia.com/terms/d/dove.asp ZrWN81EPC1GWLL7SPoLAmO/The-case-for-a-fiscal-push-in-India.html 38 18 Prem Shankar Jha, Raghuram Rajan has got it wrong on inflation and interest rates, The Wire, June 13, 2016 (accessed Commercial bank money or private sector IOUs. on September 9, 2016), http://thewire.in/42392/raghuram-rajan-has-got-it-wrong-on-inflation-and-interest-rates/ 19 Such a position could be seen as that of an “inflation owl” (Figure 4). We will discuss the view of owls later in the paper. 20 https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3018 Sashi Sivramkrishna is Professor of Economics at the School of Business Management, Narsee Monjee Institute for 21 Italics mine for emphasis Management Studies, Bengaluru, India. His research interests are contemporary macroeconomics from a Post- Keynesian perspective as well as business, economic and environmental history. Publications include contributions 22 Anup Roy & Vishwanath Nair, RBI keeps the door open on rate cuts, Livemint, August 5, 2015 (accessed on July 31, 2016) to Environment and History, the Journal of the Economic and Social History of the Orient, Global Environment, http://www.livemint.com/Politics/d5AZXiJPoR6h90NoDPQyBO/RBI-keeps-the-door-open-on-rate-cuts.html Business History, Real-World Economics Review and Economic & Political Weekly. Sashi is also an ardent Table & Image source 23 I have kept out the external sector and the objective of stable exchange rates in this discussion. documentary filmmaker; his film, A Looming Past, was screened at Forumdoc (Brazil), the Royal Anthropological

24 Institute’s Film Festival (UK), Days of Ethnographical Cinema (Russia) and the Association for Asian Studies Annual The control of money supply as an instrument of monetary policy has now been rejected. Conference (USA). Sashi can be reached at [email protected] 25 High fiscal deficit forces S&P to affirm negative outlook on India, Business Line, May 17, 2015 (accessed on August 5, 2016), http://www.thehindubusinessline.com/economy/high-fiscal-deficit-forces-sp-to-affirm-negative- outlook-on- india/article4724855.ece. Italics are my own for emphasis. 26 The Indian Express, August 26, 2013 (accessed on September 7, 2016), http://indianexpress.com/article/business/economy/fitch-warns-india-on-weak-fiscal-says-may-cut-credit-rating-if- deficit-target-not-met/ 27 Budget 2016, Economic Times, March 4, 2016 (accessed on September 7, 2016), http://economictimes.indiatimes.com/news/economy/policy/budget-2016-fiscal-policy-puts-ball-in-raghuram-rajans- court-now-says-jayant-sinha/articleshow/51247568.cms

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NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY NMIMS JOURNAL OF ECONOMICS AND PUBLIC POLICY Volume I | Issue 1 • OCTOBER - NOVEMBER 2016 Volume I | Issue 1 • OCTOBER - NOVEMBER 2016

7 Ami Shah and Ira Dugla, Raghuram Rajan leaves unfinished business at RBI, Livemint, June 20, 2016 (accessed on August 28 As it happened: Chidambaram focuses on fiscal deficit, Firstpost, February 28, 2013 (accessed on September 9, 0216), 14, 2016), http://www.livemint.com/Politics/Uw5AMLZ8sY5BtDdGbC63LN/Banks-cleanup-MPC-top-Rajans-unfinished- http://www.firstpost.com/investing/budget-2013-as-it-happened-chidambaram-focuses-on-fiscal-deficit-642856.html tasks.html 29 See for instance, Manas Chakravarty, Government spending: numbers don’t lie, Livemint, June 1, 2015 (accessed on 8 The Reserve Bank’s ability to say “No!” has to be protected: Raghuram Rajan, Scroll.in, September 3, 2016 (accessed on August 4, 2016), http://www.livemint.com/Opinion/VpODtln8lv3dEF9C8bYdUP/Government-spending-Numbers-dont- September 14, 2016), http://scroll.in/article/815619/the-reserve-banks-ability-to-say-no-has-to-be-protected-raghuram- lie.html. After uproar, India ups budget for some social welfare sectors, Reuters, July 31, 2015 (accessed on August 4, rajan (emphasis in italics is my own). 2016), http://in.reuters.com/article/2015/07/31/india-budget-idINKCN0Q51DY20150731. Aditya Kalra and Andrew 9 The recent interest rate cut on October 4, 2016, by the Reserve Bank of India has, however, led many economists and experts Macaskill, Roads before welfare: Modi faces dissent over spending shakeup, Reuters, May 19, 2015 (accessed on August to believe that Urjit Patel is turning dovish on inflation. 3, 2016), http://in.reuters.com/article/2015/05/19/india-modi-insight-idINKBN0O328W20150519 30 10 Mayur Shetty and Surojit Gupta, Man with a target: inflation and the fisc, Times of India, August 26, 2016 (accessed on Nayantara Rai, Jaitley hopes to meet GST deadline, expects Congress would ‘return to the table’, F. Business, August 7, August 30, 2016), http://timesofindia.indiatimes.com/business/india-business/Man-with-a-target-Inflation-and-the- 2015 (accessed on September 4, 2016), http://www.firstpost.com/business/jaitley-hopes-to-gst-deadline-expects- mall farmers. Majority of the fisc/articleshow/53802014.cms congress-would-return-to-the-table-2381980.html farmers (82%) borrow less than 31 11 Manas Chakraborty and Tamal Bandyopadhyay, Speed up reforms: Raghuram Rajan, Business Standard, September 6, Union Budget 2015-16: Fiscal deficit pegged at 3.9%, to reach 3% by FY’18, Business Today, February 28, 2015 (accessed Rs 5 lakhs, and 18% borrow 2003 (accessed on September 7, 2016), http://www.business-standard.com/article/finance/speed-up-reforms-rajan- on September 13, 2016), http://www.businesstoday.in/union-budget-2015-16/key-announcements/ union-budget- between Rs 5 – 10 lakhs on a 103090601072_1.html 2015-16-modi-govt-fiscal-deficit-target/story/216285.html per annum basis. Most farmers 32 12 Reboot America, The Daily Beast, July 19, 2010 (accessed on September 10, 2016), (65.79%) ar Raghuram Rajan warns against fiscal deficit driven growth, DNA, January 30, 2016 (accessed on September 7, 2016), http://www.dnaindia.com/money/report-raghuram-rajan-warns-against-fiscal-deficit-driven-growth-2171864 http://www.thedailybeast.com/articles/2010/07/19/save-the-economy-a-manifesto-by-harry-evans-joseph-stiglitz-alan- blinder-and-other-leaders.html 13 Budget 2016, Economic Times, March 4, 2016 (accessed on September 7, 2016), 33 http://economictimes.indiatimes.com/news/economy/policy/budget-2016-fiscal-policy-puts-ball-in-raghuram-rajans- RBI a vigilant owl, not a dove or a hawk: Raghuram Rajan, Economic Times, January 28, 2014 (accessed on August 31, court-now-says-jayant-sinha/articleshow/51247568.cms 2016), http://articles.economictimes.indiatimes.com/2014-01-28/news/46735215_1_governor-raghuram-rajan-doves- vigilant 14 Vrishti Beniwal, Subramanian Swamy hails Rajan exit as liberation for India economy, Livemint, June 21, 2016 (accessed 34 on August 31, 2016), http://www.livemint.com/Politics/ilbOrN2src4XgOGeqkfPqK/Subramanian-Swamy-sees-India- http://www.dallasfed.org/news/speeches/fisher/2008/fs080117.cfm growth-unchained-now-that-Raghu.html 35 See for instance, Mariana Mazzucato, Austerity is the cause of our economic woes. It’s nothing to do with EU, The 15 ‘Rajan was harming the economy’: Swamy fires fresh salvo at RBI chief, The Hindustan Times, August 7, 2016 (accessed Guardian, June 27, 2016 (accessed on August 31, 2016), on September 3, 2016), http://www.hindustantimes.com/india-news/markets-not-collapsing-but-to-go-up-as-rajan- https://www.theguardian.com/commentisfree/2016/jun/27/austerity-economic-woes-eu-referendum-brexit exits-swamy-hits-out-at-rbi-chief/story-16mQ2HQBtm2ki8Q9T7av5H.html 36 Ashok Malik, Measures by Narendra Modi can beget proper economic reforms, Economic Times, April 21, 2015, 16 2% rate cut necessary to boost SMEs, create jobs: Nirmala Sitharaman, Times of India, August 27, 2016 (accessed on http://articles.economictimes.indiatimes.com/2015-04-21/news/61378928_1_modi-government-government- August 31, 2016), http://timesofindia.indiatimes.com/business/india-business/2-rate-cut-necessary-to-boost-SMEs- spending-narendra-modi create-jobs-Nirmala-Sitharaman/articleshow/53887610.cms 37 The case for a fiscal push in India, Livemint, 7.08.2015, http://www.livemint.com/Opinion/ 17 http://www.investopedia.com/terms/d/dove.asp ZrWN81EPC1GWLL7SPoLAmO/The-case-for-a-fiscal-push-in-India.html 38 18 Prem Shankar Jha, Raghuram Rajan has got it wrong on inflation and interest rates, The Wire, June 13, 2016 (accessed Commercial bank money or private sector IOUs. on September 9, 2016), http://thewire.in/42392/raghuram-rajan-has-got-it-wrong-on-inflation-and-interest-rates/ 19 Such a position could be seen as that of an “inflation owl” (Figure 4). We will discuss the view of owls later in the paper. 20 https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3018 Sashi Sivramkrishna is Professor of Economics at the School of Business Management, Narsee Monjee Institute for 21 Italics mine for emphasis Management Studies, Bengaluru, India. His research interests are contemporary macroeconomics from a Post- Keynesian perspective as well as business, economic and environmental history. Publications include contributions 22 Anup Roy & Vishwanath Nair, RBI keeps the door open on rate cuts, Livemint, August 5, 2015 (accessed on July 31, 2016) to Environment and History, the Journal of the Economic and Social History of the Orient, Global Environment, http://www.livemint.com/Politics/d5AZXiJPoR6h90NoDPQyBO/RBI-keeps-the-door-open-on-rate-cuts.html Business History, Real-World Economics Review and Economic & Political Weekly. Sashi is also an ardent Table & Image source 23 I have kept out the external sector and the objective of stable exchange rates in this discussion. documentary filmmaker; his film, A Looming Past, was screened at Forumdoc (Brazil), the Royal Anthropological

24 Institute’s Film Festival (UK), Days of Ethnographical Cinema (Russia) and the Association for Asian Studies Annual The control of money supply as an instrument of monetary policy has now been rejected. Conference (USA). Sashi can be reached at [email protected] 25 High fiscal deficit forces S&P to affirm negative outlook on India, Business Line, May 17, 2015 (accessed on August 5, 2016), http://www.thehindubusinessline.com/economy/high-fiscal-deficit-forces-sp-to-affirm-negative- outlook-on- india/article4724855.ece. Italics are my own for emphasis. 26 The Indian Express, August 26, 2013 (accessed on September 7, 2016), http://indianexpress.com/article/business/economy/fitch-warns-india-on-weak-fiscal-says-may-cut-credit-rating-if- deficit-target-not-met/ 27 Budget 2016, Economic Times, March 4, 2016 (accessed on September 7, 2016), http://economictimes.indiatimes.com/news/economy/policy/budget-2016-fiscal-policy-puts-ball-in-raghuram-rajans- court-now-says-jayant-sinha/articleshow/51247568.cms

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