General Studies Paper 3 (Indian Economy): Macroeconomic Policy

Macroeconomic Policy

IAS Junior Mains Answer Writing June-Sep 2019 Schedule (Click Here)

 

Syllabus: General Studies Paper 3 (Indian Economy)

 

The crucial link between macroeconomic policy and unemployment has not been flagged. Critically examine the statement. And suggest the ways to correct macroeconomic policy to boost employment and growth.

 

Introduction:

The conduct of macroeconomic policy in India in recent years has compromised the principle that its two arms of fiscal and monetary policy must be used in a countervailing matter if aggregate demand is not to be affected. Instead, for too long, macroeconomic policy in India has been contractionary across the board, impacting employment adversely. The macroeconomic policy pursued in the past five years needs overhauling. The government has continued with fiscal consolidation, or shrinking the deficit, while mandating the Reserve Bank of India (RBI) to exclusively target inflation leaving aside all other considerations.

 

Body:

What is macroeconomic policy?

Macroeconomic policy deals with the overall functioning of the economy.  Macroeconomic policies are critical in shaping the landscape within which factor markets (such as labor and capital) and product markets (such as shoes, cars, or bread) operate. They have a critical influence on decisions by companies to produce, hire or fire workers, or export and import goods.

The macroeconomic policy objectives:

  • Full employment
  • Price stability
  • Economic growth
  • Balance of payments equilibrium and exchange rate stability
  • Social objectives

 

Macroeconomic policy and unemployment has not been flagged.

  • Our macroeconomic goals are not typically confined to “full employment”, “price stability”, “rapid growth”, “BOP equilibrium and stability in foreign exchange rate”
  • Our macroeconomic policy instruments include monetary policy, fiscal policy, income policy in a narrow sense.
  • But, in a broader sense, these instruments should include policies relating to labour, tariff, agriculture, anti-monopoly and other relevant ones that influence the macroeconomic goals of a country. 
  • Unemployment in India will only be reduced when there is an increased rate of growth in the number of jobs. Higher growth in employment in turn requires a faster growth in economic activity. It follows that the main way the government can promote employment growth is by using macroeconomic policy to facilitate high rates of growth in GDP. This is the demand-side of policy.
  • The other way to address unemployment is via supply-side policies. These policies seek to improve the job readiness of people who are unemployed or are making the transition from education to work, thereby making them more prepared to move into a job (or into a wider variety of jobs) when there is a faster rate of growth in employment.
  • The key elements of these policies should be to ensure participants’ skill levels are raised to make them viable job applicants and to provide pathways for them into permanent employment. 

 

Impact of poor macroeconomic policy:

  • Fiscal consolidation
    • The government has continued with fiscal consolidation, or shrinking the deficit, while mandating the Reserve Bank of India (RBI) to exclusively target inflation leaving aside all other considerations.
    • This has contracted demand. That high fiscal deficits and high inflation per se can never be good for an economy does not justify a permanently tight macroeconomic stance.
    • Both the deficit and inflation have trended downward in the past five years, yet investment as a share of national income has remained frozen.
  • Inflation targeting

Fiscal consolidation was something the government had inherited, it has taken credit for having moved India onto the path of ‘inflation targeting’.

  • Though, India has seen a virtual inflation targeting since 2013 when the policies of the RBI became more closely aligned to the practices of central banks in western economies.
  • Thus in 2013-14 the real policy rate saw a positive swing of over four percentage points, and it has more or less remained there.
  • double digits, inflation had been high in 2012-13 but that could have been due to abnormal hikes in the procurement price and not due to runaway growth.
  • The high interest rate regime in place since 2013 had a negative impact on growth by raising the cost of capital to industry.

Need to review RBI’s role:

  • A regime of high-interestrates can be bad not only for investment  and thus for growth and employment  but also for financial stability.
  • Sharp increases in interest rates can trigger distress.
  • There has been agrowth of non-performing assets of banks even after a change in the method of classification first resulted in their surging in 2015. This feature along with the spectacular collapse of the giant Infrastructure Leasing and Financial Services Ltd (IL&FS) recently point to the need to review the role of the RBI.

Steps to be taken:

  • RBI must be  tasked with far greater responsibility for maintaining financial stability while being granted wider powers.
  • Finance Ministry and its nominees on the RBI Board should desist from insisting upon actions that could jeopardise financial stability in trying to quicken the economy.
  • Movements in the financial markets are to be treated as the bellwether in economic policy-making.

 

Addressing unemployment via supply-side policies

Even as we shift towards macroeconomic policies that maintain the level of aggregate demand, we can assist the unemployed by strengthening the employment programme we already have,  namely the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

Ways to strengthening Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)

  • Need for timely payment
    • First, there have been reports that though the budgetary allocation for the scheme may have increased, workers face delay in payment. This is unacceptable, especially in this digital era when beneficiary identification and money transfer are cheap and reliable.
  • Extending MGNREGS to urban India
    • As has been suggested, there is a case for extending the MGNREGS to urban India for there is unemployment there.
    • When extended to urban India should aid municipal waste-management efforts.
    • Of course, some rationalisation of existing public expenditure would be needed to generate the fiscal space needed, but we may yet expect a positive sum outcome when this is done imaginatively.

 

Conclusion:

The entire gamut of macroeconomic policy in India needs re-thinking When policy holds back investment, and we have seen that it can, the prospect for employment growth is weak. However, as with macroeconomic policies, a thorough review of how the MGNREGS works on the ground is necessary.  In the context, we often find a reference to “asset creation”.  This is an important criterion, but we need not rule out the provision of public services under the scheme. The point is to ensure that we have desirable outcomes beyond just the job statistics. here is reason to believe that this matter is given no importance in the implementation of the scheme at present. The MGNREGS should be  extended to urban India and they should aid municipal waste-management efforts. We would then have a cleaner environment and have at the same time created jobs. That would a fitting tribute to the man after whom the programme is named, one who had worked for a clean India much of his life.

 

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