There are no doubt ups and downs in any economy due to business cycles and unforeseen developments like the recent covid pandemic. So as a result the effort, world over, particularly in democracies, the attempt is to tackle only immediate problems and that too quickly. As a result there is a tendency to opt for quick-fix solutions, which are painless, by adopting expansionist and contractionist fiscal and monetary policies resulting in the economy being always in the state of flux.

It is time economists ponder over this matter and attempt to move towards stable economic situation irrespective of the emerging situation. In case of India the only time long lasting economic reforms were attempted was in 1991 when the economy faced a major crisis, forcing the government to come out with such policies that worked for long-term good of the economy. It was not only P V Narasimha Rao, who started it, but also continued by his successors, Deve Gowda, I K Gujaral and Ata Behari Vajpayee. In fact Manmohan Singh, who was the main architect of 1991 reform as finance minister, could not carry forward reforms with the same zeal as Prime Minister, partly due to compulsions of coalition politics and his inability to manage the Political economy like Narasimha Rao or Vajpayee.

Even Deve Gowda and Gujaral were able to carry forward reforms much better. In fact P Chidambaram’s dream budget with far-reaching tax reforms were presented and passed during their short regime. These reforms were possible despite a coalition government or minority government because there was a consensus among all political parties to carry forward reforms during the 10 odd years since 1991.

So what is important is proper management of political economy. This is critical for ensuring sound and stable economic policies. This ensures macro-economic fundamentals are strong to weather the ups and downs of business cycles and unforeseen crisis. The questions therefore are we moving towards that the answer is a certain no as world over economists do not think long-term. As Maynard Keynes once said during the great depression of 1930s that in the long term “we are all dead”. That is true, but if we have to take care of subsequent generations ,there has to be a long term stability hence policies have to be evolved to ensure that long term issues are addressed even while short-term economic issues are dealt with for immediate solutions.

Former RBI Governor and economist Raghuram Rajan is right when he says one of the reasons why emerging markets have swung from crisis to crisis is that they failed to achieve consensus among political parties to establish and back mechanisms irrespective of their own immediate political priorities. Recent History shows that developed economies, too, are becoming less tolerant of pain, because their own political consensus has eroded. In the past advanced economies created mechanisms that allowed them to make hard choices when necessary and that included independent central banks and mandated limits on budget deficits. That is given a go by even in advanced economies now.

Elaborating, Rajan says in an article that financial markets have become volatile once again, owing to fears that the US Federal Reserve will have to tighten its monetary policy significantly to control inflation. But many investors still hope that the Fed will go easy if asset prices start to fall substantially. If the Fed proves them right, it will become that much harder to normalize financial conditions in the future. Investor’s hope that the Fed will prolong the party is not baseless, he said citing in late 1996, Fed chair Alan Greenspan warned of financial markets irrational exuberance. But the markets shrugged off the warning and were proved correct. Perhaps chastened by the harsh political reaction to Greenspan’s speech, the Fed did nothing. And when the stock market eventually crashed in 2000, the Fed cut rates, ensuring that the recession was mild.

As Manmohan Singh and Rajan say there are no free lunches. It is true any free lunch comes with a cost and it is time that both central and state governments shun freebies and populist measures to get votes rather than permanent well-being of the economy. This has resulted in perpetual macroeconomic instability both in advanced and emerging economies for short-term benefits. It is time economists and politicians ponder over this matter and take steps to work towards stable economies world over so that nations do not move over from crisis to crisis. Some decisions will have to be painful so that economies particularly India do not move towards high fiscal deficits, high debt and runaway inflation. (IPA Service)