Right from the 1950s through the 1990s, every decade has had its share of debates on economic issues. If the 1950s were dominated by the import substitution strategy debate, the 1960s were devoted to discussing the growth and productivity in agriculture. The 1970s and 1980s saw highly evolved debates on the modes of production in agriculture, on industrial stagnation and structural retrogression, or on factor productivity. The early part of 1990s was consumed by the liberalization debate. All these debates were high on diagnostic analysis and low on prescription. Yet these helped economic administrators in formulating, or at least calibrating, the overall policy regime.
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After the advent and acceptance of liberalization as the dominant paradigm, there have been quite a few discussions on the desirability of these changes, but hardly any debates on the design of the policy changes.
The result is that the good old-fashioned macroeconomics is now becoming almost extinct. To quip, when we had a closed economy, there was a much greater degree of intellectual vibrancy and openness than what we have now when the economy is more open. Economic openness, it would appear, is negatively correlated to intellectual openness.
On a more serious note, the fact that this lack of debate has coincided with the opening up of the economy is indicative of the fact that the economic commentators have yet to make the transition to methods of open economy macroeconomics trained as they have been in closed economy macroeconomics.
A case in point is the current dominant growth paradigm that is the centrepiece of the 11th Plan: Inclusive Growth. Inclusive growth is being packaged as a socio-economic agenda and pursued as a political economy initiative. In this packaging and pursuit, what has been ignored, if not lost, is its macroeconomic moorings.
Inclusive growth analytics have a distinct character focusing as they do on both the pace and pattern of growth. From an open economy perspective, inclusive growth ought to focus on ex ante analysis of sources and constraints to sustained high growth and not only on one group—the poor. The focus has to be on productive employment.
This is in complete contrast to the closed economy pro-poor growth practice and policy, which has focused largely on growth with income redistribution through transfer payment measures. Yet the pervasive mindset of the past has meant a continuance of closed economy policies in an open economy.
Seen in this manner, engendering inclusive growth poses serious economic policy challenges, which are not being addressed. Take the case of monetary policy. Traditionally, monetary policy has been and continues to be driven by rate of growth and is insensitive to the sources and structure of growth; be it by sector, industry, class or asset type.
With the sources and spread of growth and through that distribution becoming the focus, new conceptual elements have to be introduced into monetary policy to integrate these two strands. Operationally, the problem is that, over the years, monetary practices, institutions and structures have been developed based on a certain type of growth; these are increasingly becoming incompatible with the desired type of inclusive growth.
If indeed this is so, then institutional changes of a far-reaching kind in the monetary policy mechanism are called for. To start with monetary policy would need to take a far more disaggregated approach. The directional changes, from excess liquidity to tight liquidity or from expensive credit to cheap credit, will not serve the purpose of inclusive growth. Instead, the need is for allocative changes through sectoral measures that will change the composition of credit and help financing inclusive growth.
Yet all that the Reserve Bank of India has come up with is a programme for financial inclusion within the existing monetary policy framework making it more of an administrative intervention than a policy tool. As such the entire focus of monetary policy to aid inclusive growth has come to become not just narrow, but also very restrictive: improving access to and pricing of credit.
Implicit in this approach is that the cost of or access to capital is the binding constraint to growth for the marginalized. While delivery of credit is a constraint, it is the low and irregular income, rather than physical access to financial institutions or high costs, that is a bigger deterrent. It should be constraints to income growth, rather than access to saving instruments, that monetary policy seeks to address.
To go back to the original point, the defining policy question that needs to be debated today is how to make economic policy in general, and monetary and fiscal policy in particular, react explicitly and systemically to new domestic structures as well as international variables. This has to go beyond the influence that these variables have on the domestic output gap through external demand and domestic inflation through import price. For this, a new macroeconomic framework needs to be evolved.
Haseeb A. Drabu is the chairman and chief executive of Jammu and Kashmir Bank. He writes on monetary and macroeconomic matters from the perspective of policy and practice. The views are his own and don’t necessarily reflect the views of the organization he works for. Comment at email@example.com