Fiscal
and Monetary - Evaluation of Directional Priority
The transmission of money into capital is the essence of our
economic activities. It is truly pervasive across the globe and has astutely
survived all the worldly challenges since human memory. How and why has it
shaped our financial fortune is a revealing truth.
Whether an ordinary household investor or a new Generation swanky
Institution, irrespective of the global corner they belong to, all have the aspirations
to add to their economic fortune through the most innovative experiment.
Medieval Europeans efforts around 16th century in coining and
institutionalizing Banking, Stock market and Debt market together was a
fascinating history. The subsequent success
of commerce in Italy, England, Holland and France finally fueled their
imperialistic imagination. The financial resource turned a chaotic medieval
feudalism to an Imperialist west, subjugating and plundering rest of the world
for nearly two centuries. On similar line, the success of ancient Arab and
Indian Traders led the world to believe in their oriental opulence and
grandiose prosperity. It grew into such
an astounding illusion, that together Historians (Who wrote factual) and Poet
(Who wrote imagination) changed the narrative of wealth and wisdom as synonym of
east.
Nation in those eras, Devoid of consistent geographical Boundary and
with near absence of documentation of
financial priority, could not narrate their achievement under the modern days jargon
as specified as fiscal and monetary tool.
Post our past, the new age planet Earth civilization is more
materialistic and less platonic. Index of National prosperity, human growth and
development is now centring on the wealth we flaunt. Bigger population,
escalating needs, higher growth, and competitive wealth led us to search and
secure endless means called Capital.
During the process, we moved beyond Money to Physical Money finally
turning to electronic money. The Nation Progressed beyond Banking and entered
into the labyrinth of Capital Market. Banking system that facilitated creation
of Electronic money allowed Capital Market to invent a range of capital market
instruments from ordinary to complex as such Derivative, currency, commodity,
financially re-engineered products. Unbridled
waves of Money, capital and liquidity dismantle the man made boundary and
thereafter globalization knew no barrier. The defenseless nations rope in the most
outstanding invention of 20th century to discipline this rampaging
ravenous rage and jargonized them as fiscal and monetary policy.
Since then the Economic activity became the function of two
warring gladiators’ fiscalist and monetarist. Wars never promote discipline and order. Nation
in 20th century used either of the two- Fiscal and Monetary tools
with conditional, situation and directional propriety. Often disconnected
to each other’s presence they were used as tools to compete than to complement.
Early US during post recession era of 1920s were guided by the
priority set through the vision of a British Economist Keynes that stated to
follow fiscal prudence and fiscal adventure for all the financial mess. Pursuing
ahead for nearly next 5 decades till 1971, US engineered a Loose Fiscal Policy,
invited and accepted Current account deficits as state policy, leading to a
huge exodus of Dollar outside US. Little later the World arose from its slumber
to realize that the Dollar is now a world currency. Post 1990, “Housing for all
US citizens” led the US policy makers to sudden revert to easy monetary route
contrary to earlier stand. ”Low rate, easy capital and liquidity for all” was
the policy consequence. While in Europe, Germany and Italy successfully
negotiated the humiliation of war reparation after 1st world war
through a self destructive extra loose monetary policy. Ms Margret Thatcher did
prioritize fiscal prudence over monetary logic to rebuild their British economy
few decades later. Especially Entire Europe after World War II orchestrated
bizarre fiscal feast. Borrow, Build and Grow. Borrow build and grow. Leveraging
was no taboo. Years of fiscal profligacy led Europe to present worrying Debt to
GDP ratio and sobriquet like PIIGS. Contrary to Europe dependence on Fiscal
philosophy, south East Asian had different take. Their economy barely survived
the Capital flight of 90`s. A too bold and unimaginative monetary policy was
attributed as the prime reason. Far away,
nearly a suicidal Fiscal measure led to sovereign and currency default by few Latin
American countries. The surprise decimation of Eastern bloc nation led by
Russian`s political disintegration was an policy outcome for their smattering with
self destructive profligate fiscal policy. China displayed astute acumen of
monetary priority thereby artificially manufacturing a weak currency to fuel
and sustains its Export Led Growth, Employment and wealth.
India meekly followed a little late. Our monetary measures under the
leadership of the Giant academician Mr Manmohan Singh brought down the Interest
Rate, SLR , CRR, Repo and other to
substantial low from the height of pre 1990s. Monetarist planted small seed,
Banking system augmented that to Tsunami of Liquidity through fractional
reserve Banking. A nation who used to
beg few million dollar from World Bank, IMF have outgrowth today’s to fuel 1.8
trillion economy with 340 Billion Dollar of Forex reserve and sustainable Real
GDP growth rate of nearly 6%.
Emergence of IMF, World Bank, ADB etc further led the world into the
lap of directional policy preference. There were instances when
underdeveloped economies and developing economies were cajoled, negotiated,
combated or manipulated to accept and adopt policy doctrine of these rich
Bankers.
It is during these days of stated directional policy preference
with visible and partisan choice between fiscal and monetary policy, Emergence
of European monetary union on the shoulder of divided fiscal union was an
welcome change.
I call it coexistence of
fiscal and Monetary Priority.
The World has changed after 2008. Nation lost huge assets in 2008.
Scores of Banks and Financial institution collapsed. House hold and savers
became poor. Worldwide capital market declined. A generation of Investment
bankers vanished into thin air in US. Academicians shifted the discussion from
financial Reengineering to risk Management. Structure of Finance and financial
experiment were put under question. Isolated Policy and one directional policy
were no longer strong reasons to inspire the aspiration of Nation`s capital
formation effort. Coordination between
Central bankers and budgetary purity was now a welcome option. Stronger action
of Monetarist now needed to be matched with fiscal discipline not profligacy.
Why Few Nations have entered the dubious vulnerable zone? PIIGS
nation, disrupted North African zone and a few rogue Nations like Pakistan are
on the brink of collapse. US, Europe and
Japan are experiencing an acid test of over leveraging. Smaller economies are normally never counted.
World is back to another experiment. US, Europe, China and Japan are
crediting more space to monetary authority in their Fiscal outlines and vice
versa. India is no exception.
Mr Modi taking over the reins of Governance in May-14 and promising
to undo the stigma of policy paralysis and introducing “Make in India” was
complemented by the Capital Marker rally as mark of Fiscal resurgence. Mr Subbarao and Mr Rajan refusing to toe the
line of loose monetary idea is complementary and matching monetary resurgence.
Similar coexistence is visible elsewhere.
Cynics and renegade will term it as confrontation, futuristic and
believers would term the same as complementary.
Shall we witness an era where discipline will lead the future Policy
outline? Directional priority would
be an exception not a Law.
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