Beggars' banquet

Few practitioners of fiscal policy have written about the crisis and its consequences for national fiscs. Financial and Fiscal Policies seeks to fill that gaps

FINANCIAL AND FISCAL POLICIES
Crises and New realities
Y V Reddy, Narayan Valluri and Partha Ray
Oxford University Press
344 pages; Rs 995

In the middle of September 2008, American and European banks precipitated a global financial crisis from which the world will take another five years - at the very least - to recover. When it does, the old world order - political, military, economic and financial - would have changed forever. The biggest change will be the end of western dominance and the emergence of new economic and military power centres that can look the West squarely in the eye.

Not surprisingly, there has been a veritable flood of writings, mostly by economists, about it. The focus has been on the financial sector, which was to be expected.

One of the authors of this book, Y V Reddy, stepped down as the governor of the Reserve Bank of India just a week before the global financial crisis erupted so suddenly in 2008. Since then he has written and spoken extensively about the crisis.

This volume has been prepared under his general supervision and guidance. He is currently the chairman of the Finance Commission, which perhaps partly explains the central theme of this book: the fiscal policy challenges in the coming years.

This is just as well because few practitioners of fiscal policy have written about the crisis and its consequences for national fiscs. This book seeks to fill that gap.

But be warned, it is not an easy book to read. It is panoramic in scope, dense in content and deep in insights. It examines, in great detail, the interstices of global finance, the agendas of national Budgets and the regulatory frameworks that mesh them together. It paints the picture and lets you draw your own conclusions.

The result is an intellectual exercise that practitioners of policy, particularly fiscal policy, simply must plough through. Without its benefit, they may end up making avoidable and even perhaps egregious mistakes of judgement.

Central message
It is presumptuous to sum up the key message of a book of this width and depth in one sentence. But if a gun were put to my head this is how I would say it: what are governments going to do when the money runs out or, as in some cases, has already run out?

For the moment everyone is borrowing and taxing to make ends meet but after six years of it, national exchequers are under severe stress almost everywhere. There are some exceptions, of course. But by and large everyone is pretty nearly broke.

This, say the authors, creates some peculiar problems. They can say that again because, to paraphrase Churchill, never before in history have so many countries that account for so much of the world's output been broke at the same time.

There are no saviours left. It is each country for itself. So what should they do?

The book doesn't give any definite prescriptions because it is impossible to do that when politics determines fiscal policy and the politics of each country is different.

But it does lay down some broad guidelines. And they are all very unpleasant for citizens of all countries. This is what the book suggests:

"Large public debts need to be managed through a combination of policy responses. These include (a) higher taxes and austerity; (b) financing (the debt) through inflation; and (c) financial repression."

This means we are all going to pay a lot more to get a lot less because after the collapse of the Union of Soviet Socialist Republics, Europe and America went on a borrow-and-spend spree that enabled them, till 2008, to pay less to get more. Greece was only the extreme case of this.

End result: it is not just the current crop of citizens but future generations also that are screwed.

Poor old India
India started this century well. Its finances were looking good, inflation was down to about five per cent and the gross domestic product growth rate was up to around eight per cent.

So when the 2008 crisis hit, say the authors, India was in a good position to take counter-measures, that is, provide an artificial stimulus to aggregate demand as global demand began to sag.

But from 2011 onwards, for many diverse reasons, things started to go dreadfully wrong. The fiscal deficit went up. Inflation skyrocketed and growth faltered.

The result is that today, as the Budget for 2015-16 is being prepared, the country is faced with fiscal weaknesses that will take, if we are lucky, till 2020 to remove.

But how is that to be done?

By fiscal consolidation, say the authors.

And what does that mean?

A thorough reform of the structure of the government's expenditure.

But the authors, careful as ever, stop there.

So let me add my assessment.

Can it be done? Yes.

Will it be done?

No, or most probably not.