Dr S.Rajasulochana, Assistant Professor, Area of Finance and Strategy, TAPMI
Standard Keynesian Economics- Some caveats
Expansionary fiscal policy to revive the economy comes at the cost of fiscal indiscipline and inflation.
The Finance Minister recently announced a major fiscal stimulus - lowered tax rates for domestic firms, rolled-back enhance surcharge on capital gains on sale of equity and tax relief on buyback share of listed companies - to spur private investment and boost economic growth and employment in the country. All these concessions constitute what is known as "Keynesian prescription", will cost the exchequer Rs 1.45 lakh crore annually. The rationale is that these tax concessions and reliefs would boost aggregate demand by stimulating private investment and create employment in the economy.
Experiences from other economies show Keynesian economics is the cause of fiscal indiscipline and inflation. India may not able to keep up its fiscal deficit at 3.3% of its GDP and supply side constraints are likely to flare inflation in the country. While these tax concessions may bring short term gains to the private corporate sector, the long-term solution lies in boosting consumption expenditure from rural and informal sectors, which can happen only through improved agricultural productivity and rise real wages in rural India. The Government should endeavour to do the right thing rather than the convenient thing.