Animal spirits and stimulus4 min read . Updated: 28 Jun 2010, 08:55 PM IST
Animal spirits and stimulus
Animal spirits and stimulus
One has to jog one’s memory real hard to find another week when the United Progressive Alliance government, in the last six years, came up with two important measures that are both necessary and difficult to achieve. It needs praise. A cursory glance at a couple of leading newspapers suggests that editorial comments on both these developments have been missing.
Even the news coverage on the energy pricing decontrol and other measures announced by the government has focused a lot on the potential short-term inflationary impact of the decision, rather than on the long-term benefits as this column did some weeks ago (“UPA-II’s fiscal intoxication", Mint, 1 June). That is a pity. When we are ready to hold the government’s feet to the fire for not living up to its duties, it is equally important to encourage right behaviour, no matter how belated it is.
In fact, more than the decontrol of petroleum prices, the government deserves praise for releasing a document on national litigation. Recognizing the fact that the government in India is the biggest litigant, the document sets out clear guidelines on seeking of adjournments, filing of appeals, intra-governmental litigation and litigation between public sector units. It was also good to see the government acknowledging that it has to defend itself vigorously against frivolous public interest litigation in the matter of public projects.
Even the 25% mandatory free float of equity is a clever way to force public sector units to divest. To be sure, what one needs is change in the management culture of these enterprises that, in turn, is mostly attributable to political interference and patronage. Nonetheless, public listing of a substantial portion of the stock would bring forth certain natural accountability.
As with most government initiatives, implementation is the key and many commentators have already noted that the government of India had attempted petrol price decontrol once before and had rolled it back. Nonetheless, the reason why Bare Talk is both enthusiastic about and wishes to applaud these measures is that their significance goes beyond the specific measures. They show that the government is alive, awake and is working.
That is why the debate that is now raging in Western capitals on the importance of maintaining fiscal spending over opting for fiscal austerity is missing the point. When crises happen and animal spirits are down, its revival is not achieved through throwing more money at the problem. The public may not be rational all the time, but they are not stupid all the time either. They start to worry about the burden of the fiscal spending on their own future and that of their children. Once these worries start to mount, government spending not only loses its potency, but also becomes counterproductive.
There is also a certain sense of helplessness conveyed by the huge dependence on the government. Fiscal austerity, on the other hand, gives people a better sense of control over their destiny, by letting them showcase their ability to take pain. If markets like it too, they reward such behaviour with lower interest rates, and sooner rather than later the whole thing turns into a virtuous circle.
So Bare Talk is able to buy the argument that fiscal consolidation, under certain circumstances, could be positive for countries. The question is one of credibility with markets and whether it appears doable.
Demonstrable, credible and sincere leadership that involves personal sacrifices and other sacred cows restore faith and confidence in society, people begin to spend and businesses start to invest again. Tributes are being paid to the new Conservative chancellor of the exchequer in the UK for his grasping of the nettle on fiscal consolidation. Writing for The Financial Express, Lord Meghnad Desai reckons that the Osborne gambit might just pay off. Businesses and households would respond if they feel confident that someone is in charge.
Thus, the debate in the US on whether the government should spend more is wasteful and focuses on the wrong problem. Whether private or public, in the US, incremental gross domestic product growth has been shrinking for every additional unit of debt taken on. It is not about to reverse course now. Furthermore, Americans (e.g., Nobel laureate Paul Krugman) are criticizing other nations for focusing on the long term. Unsurprisingly, Americans are more worried about their country and their President’s stewardship while the leaders in Germany and the UK appear clearer about the direction they wish their countries to take.
In fact, what my European colleagues tell me is that, so far, fiscal consolidation appears to be on track, credible and working, in the peripheral European countries. But we need to keep an eye out for both reassuring signs and faltering signs in the euro zone.
If it is the former, it is a hugely positive signal for the euro zone in general—one that goes beyond economics. It would enhance its geopolitical standing. If it is the latter, then the downward risk to EURUSD could be substantial.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org