Modern Monetary Theory challenges mainstream thinking on how to manage an economy. It specifically challenges the view that government spending to support economies is restricted by tax collections. It is useful to think about how relevant MMT is to India.
But before we look at how relevant it is, it is important to consider two things. Firstly, fiscal expansion to boost economic recovery ensures public debt at its highest since decades. Secondly, in the 15th Finance Commission’s recent report, estimated public debt will be 85.7% of gross domestic product (GDP) in 2025-26, even after the government begins to work on getting away at its fiscal deficit.
Now, the Indian Government borrows in rupees yet the country as a whole borrows from the rest of the world. India faces financial constraints aka balance of payments, this means that India needs foreign investors to buy domestic assets in order to fund its current account deficit in dollars. This is however, unrelated to Government budgetary policy.
MMT also considers inflation and rises when economies run quicker than its productive capacity. Stephanie Kelton is one of the most influential advocates of Modern Monetary Theory points out that a government with monetary sovereignty (legal power to control currency) has control over domestic rate of interests. India does not have this freedom, as it is a price taker rather than price maker in the global financial system. Indian rates are influenced by global rates.
A final point of MMT is the view that inflation takes off only when resources are fully employed. The job of fiscal policy is to ensure full employment, instead of maintaining “ Sound finances” . But these arguments are mostly in the light of developed economies with weak demand and excess production.
The Indian situation is very complex. Labour markets are informal and employment is seasonal. This is an incessant problem of disguised unemployment and women participation in labour forces is low. There is a structural challenge to create jobs outside of the agricultural sector and these issues cannot be dealt with aggregate demand alone. Operational grey areas are very high, and a lot of critiques float around on whether MMT is viable for India.
This article has been written by Riya Rajayyan for The Paradigm.
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