Even John Maynard Keynes, arguably, never saw deficit financing as a permanent measure. His outlook was strikingly short term: in a prolonged recession, if everyone will be dead by the time equilibrium-tending forces do their textbook job, why not kickstart aggregate demand by printing cash and stuffing it into people?s pockets through public works projects? Once the economy revives, government revenues will be back up nicely enough to close the deficit and fund budgetary spending adequately. Of course, once out of the bottle, the genie of deficit spending has never quite been put back in. Keynesians, who took fiscal expansion as a sustainable policy tool, and monetarists, who insisted that the fisc should stay put and monetary policy should manage economic conditions, have had many a clash since. And the latter have won. So, year after year, economists warn governments everywhere that it all has to add up at the end; it is unwise to let fiscal prudence slip, lest all that extra money finds too few goods to buy and results in hyperinflation, growth-choking interest rates and doom.
Much of the current advice on fiscal management is a variation of the same orthodoxy. Except the prevailing wisdom now seems to favour a combination of fiscal and monetary policies, both of which could be used in conjunction to counter economic cycles. In this view, budgets should be more or less balanced while the economy is on a roll, and one should resort to deficits only once it slows down. This way, there?s no danger of a spending addiction that could prove painful if revenues decline. Also, the Keynesian kickstart would always be an option. In other words, India, on a roll, should have overshot its FRBMA targets for fiscal reduction, and prepared to cut the finances some slack only in case of a downturn. Is this sensible advice? Fiscal discipline has served the economy well, no doubt, with the cost of capital for private investors dropping sharply and overall allocation of resources turning that much more efficient. The countercyclical logic is sound, too. But in a country with such vast deprivation and so many sub-economies, decisions of what combination of Keynesian stimulus and monetary spurs to deploy, and in accordance with which cycle/subcycle, should rest with those watching the larger picture. No theory should become a fixation.
