Tag: primary deficit

Reflections on Neelkanth Mishra’s Column on the Budget

Most of what you see written about the budget is honestly not worth reading, but there are some folks whose musings ought to be mandatory reading. And if you are going to ask me for my recommendations along these lines, Neelkanth Mishra is certainly among the top three.

What follows is a style of note-taking that I used to post a lot of a couple of years ago or so. I will share those parts of his write-up that I chose to highlight, and also explain why I highlighted them. Here goes:

  1. “As the state’s footprint on the economy has shrunk over the past three decades, the relevance of the annual Union budget for the economy has contracted accordingly.”
    ..
    This point is a fairly obvious ones to professional economists, but it bears repetition. Especially because this day is treated with such importance by the media. Panel discussions, full page articles, Twitter-aflutter – although that last one doesn’t take much, so I suppose a budget day might actually be understandable! But we’re talking about roughly a tenth or so of India’s GDP where the budget is concerned, and if you take into account the fact that GST is now a reality, the centrality of the budget is reduced even further.
    Don’t misunderstand me – it is an important event, it’s not as big a deal as it once used to be.

  2. With reference to the government’s fiscal conservatism: “This seems prudent, given the limited tolerance of financial markets globally to policy errors, and the economic damage market turbulence can cause.”
    ..
    Remember Liz Truss? Things could have been far worse, and they aren’t, and that’s worth remembering.

  3. “The Union government’s commitment to the medium-term fiscal consolidation path was reiterated: A fiscal deficit of less than 4.5 per cent of GDP in fiscal year 2026.”
    ..
    I’m not sure if I should be doing a Straussian reading here in terms of what has been left unsaid, but I’m tempted to disagree with what has been written. I’m done reading about glide paths and medium term projections of the fiscal deficit. It is enough to get a sense of where it will be next year, and the data over the last twenty years or so shows us that planning for beyond that horizon is a pointless exercise. Plus, the uncertainty in the global economy is such that any number for the year 2026 is a guess. Nothing more.

  4. “Given the strong tax buoyancy this year, the government could have taken a slightly lower tax-to-GDP ratio next year than the unchanged number it has assumed, but the benefits of greater digitisation and formalisation may continue, and lower tax rates often help tax compliance.”
    ..
    I agree with the first half of the sentence, and I hope the second half turns out to be true, but I’ll want to bet against it. I would be very glad to be wrong.

  5. “Perhaps more importantly, the government chose to redeploy its savings from the fiscal support it had to provide during Covid and then in the aftermath of the Russia-Ukraine conflict to capital expenditure”
    ..
    We need to do more of capital expenditure, there is no getting around this point. Therefore agreed.

  6. “The general government debt to GDP ratio (which includes central and state debt) has fallen from 90 per cent in FY2021 to 83 per cent now, as nominal GDP growth has picked up, but it is still well above the 73 per cent seen pre-Covid, and the 60 per cent recommended by the FRBM Review Committee. For it to fall back to those levels, the primary deficit (fiscal deficit minus the interest payments) needs to fall to nearly zero. However, it is still near 3 per cent of GDP, and even at 4.5 per cent fiscal deficit in FY2026, the primary deficit would still be nearly 1 per cent of GDP.”
    ..
    See this for a relatively simple explainer of not just the theory around deficits, but also said theory’s evolution over time. Be source agnostic – by which I mean don’t depend on any one resource in particular. But this is something you should be very familiar with if you are a student of macro.

  7. “Economies like India need to grow out of their fiscal problems and cannot shrink into them.”
    ..
    I hope you don’t understand this sentence, and I hope you think about it, and then read the next sentence from the write-up.

  8. “This is where the nature of government expenditure makes a difference. Allocations to railways and roads, as well as to schemes like Pradhan Mantri Awas Yojana and for energy transition should support growth both over the near term (via expenditure) as well as the medium-term (through cheaper logistics and greater energy self-sufficiency).”
    ..
    Yup, but always beware the limitations of state capacity.

  9. “In this regard, the demand to switch back to the old pension scheme for government employees, where taxpayer funds are used to guarantee benefits to a select group, is a risky one.”
    ..
    An understatement if ever there was one.

  10. “That state governments this year may end up with an aggregate fiscal deficit of just 2.4 per cent of GDP versus the 3.4 per cent budgeted, given the surge in tax inflows and an inability to quickly ramp up spending, is also helping. The decline in bond yields on budget day is a sign, in our view.”
    ..
    In my experience, bond market dynamics remain poorly understood among both undergrad and post-grad students of economics. That’s a broad characterization, and as with all such broad characterizations, there are significant exceptions. But I still maintain that the bond markets don’t get enough importance in the teaching of macro at an introductory level.

  11. “In turbulent times like these, a good budget is just a starting point. The turmoil in the global economy is likely to continue, as the impact of higher interest rates shows up in weaker demand for consumption and investment, and geopolitical tensions continue to disrupt energy supplies and trade. As the resilience of the domestic economy gets tested by global headwinds, deft fiscal manoeuvres may be necessary, like they were this year.”
    ..
    With this budget, we’ve left ourselves some wriggle room if things go south really badly really quickly this year – and they well might do so.


Your mileage may vary, but the meta-point of this post (and all such posts by me) is not just to show you which parts of an article I found worth highlighting. It is also to tell you that note-taking is an underrated activity. Get into the habit of taking notes for the good stuff that you read. You don’t need to make your notes public like I just did (although skin in the game remains an underrated concept). But the more you take notes, the more you’ll begin to connect the dots across different stuff you’ve read, and then you’re off to the races.

Build the habit of taking notes and trust me, it is very much a superpower.

Understanding Fiscal Policy (3/3)

You might want to read Monday and Tuesday’s post before you begin in on this one.

In today’s post, we conclude by thinking through the section titled “Making Space While The Sun Shines“

  1. I’ve used the analogy of a human body throughout this little series, and I’ll press the point a little further here.
    One major problem that crops up when treating a seriously ill patient is about both the strength and the duration of the dosage. How much should the dose be per day, and for how many days should the patient take the medicine?
  2. Similarly, when it comes to fiscal policy, how much is enough? What if you give too little of a push? Then the recovery is anemic. What if you nudge a little bit too much? We’re back in 2011-2014 territory – and please do read The Lost Decade!
  3. Which is where this section of the article becomes really important: there is no model, anywhere in the world, that tell you what to do now. That is a strong way to put it, but let me be clear: there is no model anywhere in the world that will tell you what to do now. The cause of this current crisis, the crossroads at which the Indian economy found itself before this crisis, the uncertainty about how this crisis will play out and eventually end, and the uncoordinated global response(s) to this crisis all put together mean that we economists don’t know for sure how much fiscal policy is too much. We don’t know for how long we should keep the fiscal stimulus going. We’re, as it were, flying blind.
  4. What Sajjid Chinoy is saying, however, is this: whenever you cross a certain threshold of the vaccination drive, you need to start the process of unwinding the stimulus. That is what this excerpt means:
    ..
    ..
    “Counter cyclicality must be symmetrical: supporting activity in times of a shock, but then quickly retreating to create space when vaccinations reach a critical mass and the recovery becomes more entrenched.”
    ..
    ..
    Will this actually happen? For India’s sake, let us hope so. Our track record is less than encouraging in this regard.
  5. Familiarize yourselves with the great r>g debates. In this decade, they’re going to matter.
  6. Familiarize yourselves with the meaning and the importance of the primary deficit.
  7. Familiarize yourselves with the what the phrase “dual mandate” means when it comes to monetary policy.
  8. Pts. 5 through 8 are hopefully going to be areas that you will cut your teeth on if you join the market as a macroeconomist over the next five years. Hopefully because if we are still on pts. 2-4 until that point of time, this pandemic will obviously still be with us.
  9. But if it has gone by then, (god, I hope so!), managing the recovery and its aftermath will the macroeconomic challenge of this decade.

Learn Macro by Reading the Paper

Macro, and I’ve said this before, is hard.

But a useful way to start understanding it, at least in an Indian context, is by:

  • carefully reading a well written article
  • understanding and noting for oneself key concepts within that article
  • recreating the charts from that article
    • That includes figuring out the source of the data…
    • … as well as acquiring the ability to build out these charts
  • And most important of all, creating a piece of your own (could be a YouTube video/short, a blog, an Instagram story, a Twitter thread) that helps simplify the article you’ve read.((Skipping this last point is missing the point altogether, rascalla!))

Now, Arvind Subramanian and Josh Felman have generously obliged us by writing a well written article. I’ll oblige you by carefully reading it and annotating it, including pointing out key concepts, sources for data and recommendations for building out the charts.

That just leaves the last point for you, dear reader. We’ll call that homework.

Now, the well written article:

For more than a decade, India’s fiscal problem has been on the back-burner, acknowledged as a concern, but excluded from the ranks of pressing issues. Now, however, the problem is back with a vengeance. COVID has upended the fiscal position, and fixing it will require considerable time and effort, even if the economy recovers. This worrisome prospect has prompted calls for the Fiscal Responsibility and Budget Management Act (FRBM) to be dusted off, reintroduced, and implemented — this time, strictly and faithfully. But before we heed them, we need to understand why the previous FRBM strategy failed and how to prevent a repeat. We argue below that the new strategy will look nothing like the current FRBM.

https://indianexpress.com/article/opinion/columns/coronanvirus-india-economy-gdp-growth-post-covid-7261915/

First things first, what is FRBM?

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of India to institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence. The main purpose was to eliminate revenue deficit of the country (building revenue surplus thereafter) and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008.

https://en.wikipedia.org/wiki/Fiscal_Responsibility_and_Budget_Management_Act,_2003

Think of it as a one-person Alcoholic’s Anonymous club. It is of the government, for the government and by the government, and the idea is to wean the government off a dangerous addiction that it is hopelessly affixed to: debt.

By the way, there are many reasons this is a good essay, not the least of which is how well structured it is. The first three sentences in the very first paragraph, excerpted above, point out the problem that is going to be addressed, without using any difficult words or jargon. Then they point out the tool that will be used to address the problem. Then they point out the tool itself has problems. Finally, the explain that the essay is about fixing those problems. And then the essay follows. You might want to keep this in mind when writing your own essays (or indeed creating your own podcasts/videos etc.)

Now, back to the essay:

  1. What is general government debt? Where can I access the data?
    Note the second hyperlink above: I’ve linked to the Fred St Louis page about India’s debt, which itself gets the data from the IMF. Here is the page from the Ministry of Finance’s own website titled Public Finance Statistics. It has not been updated since September 2015. Here is a Motilal Oswal report on the subject that pegs general government debt at INR 157,227 billion. (Exhibit 1 in the report). If you read footnote 3 of that exhibit, two things happen. The first thing that happens is that you realize that tracking down general government debt might take a while. The second thing that happens is you feel a rather large twinge of sympathy for the folks who have tried to do this exercise.
    Figure 1 in the well-written article that we are analyzing in today’s post doesn’t mention a source, unfortunately. So recreating that chart will involve a rather large part of our day – but I would strongly recommend that you do the exercise. If you want to analyze Indian macroeconomic data for a living, this will be a good initiation. And indeed, a write-up about this exercise alone is a worthy addition to your CV!
  2. Second r-g: what is r, and what is g?
    1. “r” is the policy rate, which in our case will be the repo rate. This is available on the homepage of the RBI, top-left, under current rates.
    2. Time series data? Available on the DBIE page, under key rates.
    3. “g” is the nominal growth rate of the economy, and can be found at MOSPI.
    4. A useful thing to do as a student is to try and recreate the chart in the well-written article.
    5. Pts 1 and 2 here will help you get most of the data, and try and use either Microsoft Excel or Datawrapper to recreate the chart.((Document your learnings as you go along.))
  3. Next, what is primary balance?((Read the whole article, please. It’s a good way to clear your understanding of this topic, and it is free)) Where does one get that data in India?((The Excel link under Deficit Statistics was down when I tried to access the data. Your mileage may vary.))
  4. Next, this sentence from the article: “Simple fiscal arithmetic shows that debt does not explode when the former (primary balance) is greater than the latter (interest-growth differential)”. What is this “simple fiscal arithmetic”? They’ve explained it in equations 1 and 2 in this paper.((Page 3))
  5. The next three paragraphs after Figure 1 in the article point out how precarious India’s situation is when it comes to government debt, and why. It is one thing to read about the equation in a textbook, it is quite another to “run” the numbers in practice. Give it a shot, please, and see if it makes sense.
  6. Next, this paragraph from the article:
    “First, India should abandon multiple fiscal criteria for guiding fiscal policy. The current FRBM sets targets for the overall deficit, the revenue deficit and debt. This proliferation of targets impedes the objective of ensuring sustainability, since the targets can conflict with each other, creating confusion about which one to follow and thereby obfuscating accountability.”
    This paragraph is a good way to understand the importance of reading In The Service of the Republic, by Kelkar and Shah (and also to read up about the Tinbergen Rule).
  7. The next three paragraphs after that are a good way to understand what Goodhart’s Law means in practice.
  8. And finally, see if you can explain to yourself why targeting the primary balance is better than other options. Personally, I agree that it is a better target, and I agree that rather than setting down a concrete number to reach, averaging out half a percentage point worth of reduction is better. In essence, what they’re saying is that you shouldn’t try to reach x kilos of weight on a diet, but lose x% body weight every month. As our ex-captain might have put it, process over results. One of our gods advocates this too, as Navin Kabra points out.
    My reservation comes from the fact that sticking to a diet is hard, and that is true whether you’re targeting a process or a target. In other words, it is the ongoing implementation of the plan that is the challenge, not it’s design!
  9. One last point: without creating something that you are willing to put up for public consumption, and highlighting on your CV as an exercise you have done – you haven’t really learnt. Reading either that article or this blog is the easy part – explaining it somebody else is the much more difficult (and causally speaking, therefore meaningful) bit.
  10. Please, do it!