Tuesday, June 4, 2019

Does India Need to Revisit its Macroeconomic Framework?

In his new IDFC Institute () Working Paper, Dr Niranjan Rajadhyaksha (  asks if simultaneously met the targets in a hypothesized '2-4-6-8'  macroeconomic framework that, without explicit enunciation, one can assume it has followed over the past decade or so: with a 2% target for the Current Account Deficit, an Inflation Target of 4%, a 6% target for its Consolidated Fiscal Deficit (i.e. fiscal deficits of states and the Centre combined, as a percent of national GDP) and an 8% (aspirational) target for RGDP growth. The short answer is No, but even the more nuanced answer cannot see the glass as half-full. the Table below shows the results over the last decade. The caveat being that, except for the inflation target and the target for the consolidated fiscal deficit (which have each been set out explicitly), the other two targets have not been explicitly stated, and the RGDP 'target' is more aspirational than normative in nature.

The data for the past decade with respect to these big macroeconomic variables is set out in the Table below.But, left-to-right, the targets for the variables in the columns are actually in the order 8-4-6-2]

The best years for Growth & Inflation: 2015-16 and 2016-17 (8% 4.9%; and 7.9% 4.5%) but these are also years with fiscal deficits higher than target & with the Current Account Deficit below target. The Working Paper nicely explains a that Indian macroeconomic policy faces (as do the macroeconomic policies of all countries similarly situated), suggests the right choice of path among the three, and further strongly recommends that future targets should not only be internally consistent but also with the Tinbergen Rule, named for Dutch economist Jan Tinbergen, that the number of variables to be controlled and the number of policy instruments available for the purpose must be equal.