Monetising Deficit To Up Health, Education Spend Worth Considering: Jim O’Neill
The author of ‘BRIC’ report has an idea for the Modi government.
The Narendra Modi-led government should use the Covid-19 crisis to seriously deal with the huge challenges India faces in sectors such as education and health. The fiscal cost attached to this could be partly monetised by the central bank.
That’s according to Jim O’Neill, currently chair of the Chatham House and former chief economist at Goldman Sachs, who coined the term BRIC in 2001, grouping India among a set of developing economies with potential to lead global economic growth.
If they [Modi government] try to seriously deal with the huge educational challenges in India and the huge systematic health challenges in India, and if the fiscal costs of that would end up being the reason the central bank would end up doing some more ambitious monetisation, I think that would be an incredibly smart thing to do. And I think markets around the world would be forgiving.Jim O’Neill, Chair, Chatham House
“I would go out of my way to publicly embrace such an initiative if they did,” O’Neill said.
According to him, fixing some of these structural weakness is important for India to reach its long-term growth potential. “In the spirit of never letting a crisis go to waste, why not?”
About the fear that any large fiscal expansion or deficit monetisation could pull down India’s sovereign rating, O’Neill said countries should respect these institutions but not let them drive decisions. Rating agencies are reactive and “lagging indicators.” Countries should do the right thing, he said.
One way to keep rating agencies pacified would be to put in place a medium-term framework. Setting up an independent fiscal council, which has been suggested by a number of committees, would be “exactly the right thing to do,” he said.
I think the rating agencies would be pretty forgiving too. If they saw that there was a major rise in government spending but that is exclusively towards health and education, I cannot imagine why a sensible rating agency would want to downgrade India. If I were running a rating agency, it would be a criteria for an upgrade.Jim O’Neill, Chair, Chatham House
Watch the full interview below:
India: A Disappointment?
O’Neill, who Modi called on for consultations in 2013, maintained that India’s performance so far has been disappointing.
Growth in the Indian economy slowed for the third consecutive year in 2019-20 to 4.2%. While the Covid-19 crisis hurt growth in the fourth quarter, the economy has declining growth rates since 2016-17. India’s growth performance, according to O’Neill, has been “very disappointing over the last few years”.
It starts to make one wonder whether many of us over-estimated India’s growth potential in the first place. There has been a combination of global shocks and domestic Indian policy disappointments... The Modi government has talked a very good game of structural policy reform. But when it comes to it, it has often shied away from it.Jim O’Neill, Chair, Chatham House
O’Neill recalled that more than a decade ago, as chief economist at Goldman Sachs, he and his colleagues had recommended 10 steps India needs to take to achieve its potential.
These included improving governance, raising educational standards, controlling inflation, a credible fiscal policy, improving trade relations, boosting agricultural productivity and infrastructure, among others.
“India has simply not done those things. Until it does, it is going to be difficult for India to get to the double-digit rates of economic growth, that, in theory, its remarkable demographics give it the opportunity to achieve.”
Limited Room For Emerging Markets
More broadly, O’Neill agreed that emerging economies have far lesser room to support local economies than developed markets.
Developed economy governments and central banks have committed to do “whatever it takes”. So have policymakers in emerging markets. The difference is the scale and what constitutes ‘whatever it takes’.
- In the U.S., the Federal Reserve has expanded its balance sheet to $7.1 trillion, up from $4.4 trillion before the Covid crisis hit.
- The Bank of Japan has pledged unlimited purchases of government bonds and expanded its exchange-traded fund buying.
- The European Central Bank has announced a $1.35-trillion asset purchase programme.
In contrast, most emerging market central banks, including India, are treading cautiously. Most have relied on domestic lenders to absorb additional supply of government bonds, while staying away from outright financing of deficits, showed recent data from the Institute of International Finance.
Can emerging market central banks afford to turn more aggressive and step up their support of local economies?
Because of the peculiarities of the international monetary system, many so called emerging economies simply don’t have the wherewithal or the institutional credibility to take the kind of financial risks that so many developed countries have done. If, for instance, an emerging country were to embark on the kind of fiscal expansion Japan has undertaken, markets might panic about that country. That is the reality.Jim O’Neill, Chair, Chatham House
O’Neill said the fear in markets is that “so many governments in the emerging world are so badly run” that they would use the current situation as an excuse to veer away from prudent policies. “That’s why markets worry about them.”
Still, in any of these countries, governments, if they are thoughtful, can use this opportunity to be more ambitious, O’Neill said.