Paradigm Shift on fiscal deficit
Background:-
The high point of the Budget for 2016-17 is its adherence to the road map for fiscal consolidation by fixing the fiscal deficit at 3.5 per cent of the gross domestic product (GDP). This is an extremely welcome step and sends out a clear message that the goal of the government is to accelerate growth under conditions of macroeconomic stability. However, in this context, two different questions arise. One is about the credibility of this commitment and the other, a more fundamental one, is whether it is necessary at all to adhere to a fixed road map.
What is ‘Fiscal Deficit’?:-
The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government.
How is it set up currently?
Currently, the Fiscal Responsibility and Budget Management (FRBM) Act insists on a blanket 3% arithmetical limit on fiscal deficit.
FRBM Act:-
Fiscal Responsibility and Budget Management (FRBM) Act was enacted by Parliament in 2003 to progressively cut fiscal deficit to 3% levels by 2008.
- FRBM Act put limits on the fiscal and revenue deficit of the country by setting targets for both.
- These targets were to be monitored through the year by setting mid-year targets.
- The government was to provide a medium-term fiscal policy statement, fiscal policy strategy statement and macro-economic framework statement to Parliament.
- The Act, however, provides exception to government in case of natural calamity and national security.
The limbs of Growth:-
Currently, the Fiscal Responsibility and Budget Management (FRBM) Act insists on a blanket 3 per cent arithmetical limit on fiscal deficit.The logic of correlation between credit expansion and fiscal deficit has five sequential limbs.
| One, money is the blood of economic growth. |
| Two, most money that fuels the economy is created by banks, not by government. |
| Three, banks and financial institutions fund business and others, and it is that credit money which drives the economy. |
| Four, if, for whatever reason including lack of business confidence, the bank credit to the economy does not adequately grow, like it did not in the last few years, economic growth will suffer for want of adequate money. |
| Five, that is when the Budget needs to step in, to pump money into the economy by incurring deficit (spending more than the income), and, for the purpose, borrow the money lying with banks or even by printing more money, if that is needed. |
The fifth limb ensures that growth does not decelerate for want of enough money circulating in the economy. Otherwise, it will. The FRBM law has ignored the fourth and fifth limbs of the logic and fixed the 3 per cent fiscal deficit as inviolable. The time has come to uncover how far its intents match with the reality and how rational its fixation with the 3 per cent limit is. The working of the FRBM law, particularly in the last few years, needs a reality check.
Emergence of targeted Fiscal Deficit:-
To preface the reality check on the FRBM law, it is necessary to know how the 3 per cent fiscal deficit limit emerged. The story is amusing, even bizarre. The magic number made its debut in the famous Maastricht Treaty to form the European Union (EU) in 1992. The treaty prescribed four criteria which EU members had to comply to be eligible to adopt the Euro as the common currency. One criterion was the 3 per cent fiscal deficit limit — the others being limits on inflation, long-term interest rates and public debt.
Why did the EU treaty mandate the 3 per cent limit? EU members like Greece and Italy were operating on high fiscal deficits while Germany and France had much lower numbers. In the tussle between prudent and profligate EU members, the limit emerged as a negotiated rate after give and take. There was “no objective economic basis” for it . That the 3 per cent limit was not aligned to the economic realities of EU was soon established by its own experience. Ten of the 12 EU members breached the 3 per cent limit over 12 years, from 1999 to 2011 — Greece, every year; Portugal, 10 years; Italy, eight; France, seven; and the strongest one, Germany, five.
The Indian context:-
Now, come to how the 3 per cent limit got its celebrated status in Indian fiscal economics. It was an open secret that the FRBM Act enacted in 2003and implemented from 2004, had adopted the ready-made EU limit of 3 per cent. But some fake reports had first hinted that an expert committee, which never existed, had recommended the limit. Faced with criticism that the EU rate of 3 per cent was carbon copied into the FRBM Act, some convoluted arithmetic was devised retroactively to explain the logic of the magic figure of 3 per cent.
The explanation went thus: the time-series household financial savings of India plus external savings was 13 per cent; out of that, 5 per cent would “go” to private sector corporates; of the balance 8 per cent, 2 per cent would “go” to public sector undertakings, “leaving” 6 per cent for Central and State governments to be shared between them (50:50), that is 3 per cent each, to fund their deficits.
The expert view rested on two basic assumptions: one, the financial savings would ever remain at 13 per cent, neither rise nor fall; two, obeying the experts, 5 per cent of it would “go” to private corporates. What if the private sector refused to take part of it? That is, if the credit offtake goes down, as it has in the last few years in India? And what if the financial saving rises? Or falls? The experts appear to have no answers. The fake explanation for 3 per cent was intended to hide the copycat fiscal economics written into the FRBM limits.
The guild of economists the world over — which rarely agrees on most issues — unanimously agrees that as money is critical for economic growth, without adequate money, GDP growth will suffer. The economic debate on the money-growth link dates back to the Great Depression of the 1930s.
While the celebrated Nobel laureate, Milton Friedman, talked about inadequate money supply as the cause of the Great Depression, James Tobin pointed to inadequate demand for money (credit) as the cause. That is even if there is money, a lack of business confidence or high interest may reduce the demand for money. There is no doubt that both — lack of money supply as well as lack of demand for credit — weaken growth.
From 2012-13 to now, i.e. 2015-16, the Indian economy seems to have been experiencing both the Milton and Tobin effects — shrinking money expansion and credit demand shrinking even faster.
Conclusion:-
Aligning the monetary and fiscal economies means this. If bank credit growth falls, fiscal deficit may need to go up. If bank credit growth rises, fiscal deficit should reduce. This is particularly true for a growing economy like India. Had the fiscal deficit not been above the FRBM ideal limit of 3 per cent in the last four years, the growth would have suffered even more. It does not need a seer to say that the FRBM law as its stand harms the economy. The Finance Minister has rightly decided to get it reviewed.
100 Percent FDI In Multi Brand Marketing Of Food:-
The decision to allow 100 percent FDI in multi brand marketing to food grown and processed in India will act as a catalyst for the food processing sector in India
Mahila e-Haat:-
Mahila e-Haat is a unique online platform where participants can display their products. It is an initiative for women across the country as a part of ‘Digital India’ and ‘Stand Up India’ initiatives of Prime Minister.
This initiative can prove to be a game changer since it will provide access to markets to thousands of women who make products and are spread all over the country but have little access to markets. The initiative is unique since this is the first time that the government will help women to sell products online.
Mahila E-Haat is an initiative for meeting aspirations and need of women entrepreneurs which will leverage technology for showcasing products made/manufactured/sold by women entrepreneurs. They can even showcase those services being provided by them which reflect creative potential e.g. tailoring.
This unique e-platform will strengthen the socio-economic empowerment of women as it will mobilize and provide better avenues to them. More than 10000 Self Help Groups (SHGs) and 1.25 Lakh women beneficiaries would be benefited from the day of launch of the site itself. Participation in e-Haat is open to all Indian women citizens more than 18 years of age and women SHGs desiring for marketing their legal products/services after indemnifying RMK from any or all acts of transaction.
The e-Haat is expected to result in paradigm shift enabling women to exercise control over their finances. The entire business of e-Haat can be handled through mobile phone. The product, along with photograph description, cost and mobile no./address of the participants will be displayed on the e-Haat enabling direct contact between sellers/service providers and buyers.
To check black money flow, RBI to share FDI-related info with IB, RAW:-
The Reserve Bank of India (RBI) will share FDI-related information with the Intelligence Bureau (IB) and Research and Analysis Wing (RAW) — to check black money from entering the country.
The FDI comes either through automatic route (which gets recorded by RBI) or through Foreign Investment Promotion Board (FIPB), which is responsible for processing of FDI proposals and making recommendations for government approval.
Even after FIPB has approved a FDI proposal, concerned government agencies will not know whether the investment has actually come into India. The only organisation, which will know when the investment actually comes into the country, is RBI.
Hence, it was felt that they should form a database on it and share details with both IB and RAW
Facts:-
- Chapchar Kut, the most important traditional festival of the Mizos is being celebrated across Mizoram and also in the Mizo-inhabited areas in the neighbouring states. It is celebrated after completion of their most arduous task of Jhum operation i.e., jungle-clearing (clearing of the remnants of burning). It is a spring festival celebrated with great fervour and gaiety.
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At a survey of fauna in the Shendurney Wildlife Sanctuary, Kerala ,a butterfly species, Tufted White Royal, was recorded for the first time in the State.
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Four species of Impatiens (Kasi Thumba) plants believed to have gone extinct were rediscovered from the Western Ghats recently.According to the researchers, these plants, usually found 2,000 ft above sea level, are short-lived and will be seen only one quarter of a year.
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New snake species discovered in Gujarat . The new snake genus, Wallaceophis is named after Alfred Russel Wallace for his pioneering work on biogeography, and for co-discovering the theory of natural selection. The species has been named gujaratensis.The find is one of the rarest of moments in the recent reptile history of India.
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The United Nations has shaped so much of global co-operation and regulation that we wouldn’t recognise our world today without the UN’s pervasive role in it. So many small details of our lives – such as postage and copyright laws – are subject to international co-operation nurtured by the UN.
In its 75th year, however, the UN is in a difficult moment as the world faces climate crisis, a global pandemic, great power competition, trade wars, economic depression and a wider breakdown in international co-operation.
Still, the UN has faced tough times before – over many decades during the Cold War, the Security Council was crippled by deep tensions between the US and the Soviet Union. The UN is not as sidelined or divided today as it was then. However, as the relationship between China and the US sours, the achievements of global co-operation are being eroded.
The way in which people speak about the UN often implies a level of coherence and bureaucratic independence that the UN rarely possesses. A failure of the UN is normally better understood as a failure of international co-operation.
We see this recently in the UN’s inability to deal with crises from the ethnic cleansing of the Rohingya Muslims in Myanmar, to civil conflict in Syria, and the failure of the Security Council to adopt a COVID-19 resolution calling for ceasefires in conflict zones and a co-operative international response to the pandemic.
The UN administration is not primarily to blame for these failures; rather, the problem is the great powers – in the case of COVID-19, China and the US – refusing to co-operate.
Where states fail to agree, the UN is powerless to act.
Marking the 75th anniversary of the official formation of the UN, when 50 founding nations signed the UN Charter on June 26, 1945, we look at some of its key triumphs and resounding failures.
Five successes
1. Peacekeeping
The United Nations was created with the goal of being a collective security organisation. The UN Charter establishes that the use of force is only lawful either in self-defence or if authorised by the UN Security Council. The Security Council’s five permanent members, being China, US, UK, Russia and France, can veto any such resolution.
The UN’s consistent role in seeking to manage conflict is one of its greatest successes.
A key component of this role is peacekeeping. The UN under its second secretary-general, the Swedish statesman Dag Hammarskjöld – who was posthumously awarded the Nobel Peace prize after he died in a suspicious plane crash – created the concept of peacekeeping. Hammarskjöld was responding to the 1956 Suez Crisis, in which the US opposed the invasion of Egypt by its allies Israel, France and the UK.
UN peacekeeping missions involve the use of impartial and armed UN forces, drawn from member states, to stabilise fragile situations. “The essence of peacekeeping is the use of soldiers as a catalyst for peace rather than as the instruments of war,” said then UN Secretary-General Javier Pérez de Cuéllar, when the forces won the 1988 Nobel Peace Prize following missions in conflict zones in the Middle East, Africa, Asia, Central America and Europe.
However, peacekeeping also counts among the UN’s major failures.
2. Law of the Sea
Negotiated between 1973 and 1982, the UN Convention on the Law of the Sea (UNCLOS) set up the current international law of the seas. It defines states’ rights and creates concepts such as exclusive economic zones, as well as procedures for the settling of disputes, new arrangements for governing deep sea bed mining, and importantly, new provisions for the protection of marine resources and ocean conservation.
Mostly, countries have abided by the convention. There are various disputes that China has over the East and South China Seas which present a conflict between power and law, in that although UNCLOS creates mechanisms for resolving disputes, a powerful state isn’t necessarily going to submit to those mechanisms.
Secondly, on the conservation front, although UNCLOS is a huge step forward, it has failed to adequately protect oceans that are outside any state’s control. Ocean ecosystems have been dramatically transformed through overfishing. This is an ecological catastrophe that UNCLOS has slowed, but failed to address comprehensively.
3. Decolonisation
The idea of racial equality and of a people’s right to self-determination was discussed in the wake of World War I and rejected. After World War II, however, those principles were endorsed within the UN system, and the Trusteeship Council, which monitored the process of decolonisation, was one of the initial bodies of the UN.
Although many national independence movements only won liberation through bloody conflicts, the UN has overseen a process of decolonisation that has transformed international politics. In 1945, around one third of the world’s population lived under colonial rule. Today, there are less than 2 million people living in colonies.
When it comes to the world’s First Nations, however, the UN generally has done little to address their concerns, aside from the non-binding UN Declaration on the Rights of Indigenous Peoples of 2007.
4. Human rights
The Human Rights Declaration of 1948 for the first time set out fundamental human rights to be universally protected, recognising that the “inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world”.
Since 1948, 10 human rights treaties have been adopted – including conventions on the rights of children and migrant workers, and against torture and discrimination based on gender and race – each monitored by its own committee of independent experts.
The language of human rights has created a new framework for thinking about the relationship between the individual, the state and the international system. Although some people would prefer that political movements focus on ‘liberation’ rather than ‘rights’, the idea of human rights has made the individual person a focus of national and international attention.
5. Free trade
Depending on your politics, you might view the World Trade Organisation as a huge success, or a huge failure.
The WTO creates a near-binding system of international trade law with a clear and efficient dispute resolution process.
The majority Australian consensus is that the WTO is a success because it has been good for Australian famers especially, through its winding back of subsidies and tariffs.
However, the WTO enabled an era of globalisation which is now politically controversial.
Recently, the US has sought to disrupt the system. In addition to the trade war with China, the Trump Administration has also refused to appoint tribunal members to the WTO’s Appellate Body, so it has crippled the dispute resolution process. Of course, the Trump Administration is not the first to take issue with China’s trade strategies, which include subsidises for ‘State Owned Enterprises’ and demands that foreign firms transfer intellectual property in exchange for market access.
The existence of the UN has created a forum where nations can discuss new problems, and climate change is one of them. The Intergovernmental Panel on Climate Change (IPCC) was set up in 1988 to assess climate science and provide policymakers with assessments and options. In 1992, the UN Framework Convention on Climate Change created a permanent forum for negotiations.
However, despite an international scientific body in the IPCC, and 165 signatory nations to the climate treaty, global greenhouse gas emissions have continued to increase.
Under the Paris Agreement, even if every country meets its greenhouse gas emission targets we are still on track for ‘dangerous warming’. Yet, no major country is even on track to meet its targets; while emissions will probably decline this year as a result of COVID-19, atmospheric concentrations of greenhouse gases will still increase.
This illustrates a core conundrum of the UN in that it opens the possibility of global cooperation, but is unable to constrain states from pursuing their narrowly conceived self-interests. Deep co-operation remains challenging.
Five failures of the UN
1. Peacekeeping
During the Bosnian War, Dutch peacekeeping forces stationed in the town of Srebrenica, declared a ‘safe area’ by the UN in 1993, failed in 1995 to stop the massacre of more than 8000 Muslim men and boys by Bosnian Serb forces. This is one of the most widely discussed examples of the failures of international peacekeeping operations.
On the massacre’s 10th anniversary, then UN Secretary General Kofi Annan wrote that the UN had “made serious errors of judgement, rooted in a philosophy of impartiality”, contributing to a mass murder that would “haunt our history forever”.
If you look at some of the other infamous failures of peacekeeping missions – in places such as Rwanda, Somalia and Angola – it is the limited powers given to peacekeeping operations that have resulted in those failures.
2. The invasion of Iraq
The invasion of Iraq by the US in 2003, which was unlawful and without Security Council authorisation, reflects the fact that the UN is has very limited capacity to constrain the actions of great powers.
The Security Council designers created the veto power so that any of the five permanent members could reject a Council resolution, so in that way it is programmed to fail when a great power really wants to do something that the international community generally condemns.
In the case of the Iraq invasion, the US didn’t veto a resolution, but rather sought authorisation that it did not get. The UN, if you go by the idea of collective security, should have responded by defending Iraq against this unlawful use of force.
The invasion proved a humanitarian disaster with the loss of more than 400,000 lives, and many believe that it led to the emergence of the terrorist Islamic State.
3. Refugee crises
The UN brokered the 1951 Refugee Convention to address the plight of people displaced in Europe due to World War II; years later, the 1967 Protocol removed time and geographical restrictions so that the Convention can now apply universally (although many countries in Asia have refused to sign it, owing in part to its Eurocentric origins).
Despite these treaties, and the work of the UN High Commission for Refugees, there is somewhere between 30 and 40 million refugees, many of them, such as many Palestinians, living for decades outside their homelands. This is in addition to more than 40 million people displaced within their own countries.
While for a long time refugee numbers were reducing, in recent years, particularly driven by the Syrian conflict, there have been increases in the number of people being displaced.
During the COVID-19 crisis, boatloads of Rohingya refugees were turned away by port after port. This tragedy has echoes of pre-World War II when ships of Jewish refugees fleeing Nazi Germany were refused entry by multiple countries.
And as a catastrophe of a different kind looms, there is no international framework in place for responding to people who will be displaced by rising seas and other effects of climate change.
4. Conflicts without end
Across the world, there is a shopping list of unresolved civil conflicts and disputed territories.
Palestine and Kashmir are two of the longest-running failures of the UN to resolve disputed lands. More recent, ongoing conflicts include the civil wars in Syria and Yemen.
The common denominator of unresolved conflicts is either division among the great powers, or a lack of international interest due to the geopolitical stakes not being sufficiently high. For instance, the inaction during the Rwandan civil war in the 1990s was not due to a division among great powers, but rather a lack of political will to engage.
In Syria, by contrast, Russia and the US have opposing interests and back opposing sides: Russia backs the government of the Syrian dictator Bashar al-Assad, whereas the US does not.
5. Acting like it’s 1945
The UN is increasingly out of step with the reality of geopolitics today.
The permanent members of the Security Council reflect the division of power internationally at the end of World War II. The continuing exclusion of Germany, Japan, and rising powers such as India and Indonesia, reflects the failure to reflect the changing balance of power.
Also, bodies such as the IMF and the World Bank, which are part of the UN system, continue to be dominated by the West. In response, China has created potential rival institutions such as the Asian Infrastructure Investment Bank.
Western domination of UN institutions undermines their credibility. However, a more fundamental problem is that institutions designed in 1945 are a poor fit with the systemic global challenges – of which climate change is foremost – that we face today.