Ahirjoy's Blog

First, fiscal deficits do indeed matter. They matter less when a country has underperformed for so long that it has big catch-up possibilities that fuel growth, and this explains why India has not suffered like some other countries. Yet the taming of fiscal deficits and inflation in 2004-09 led to sharply reduced interest rates that were crucial in making India competitive in its 9% growth phase. The Fiscal Responsibility and Budget Management (FRBM) is a crude tool, yet did indeed help cut the fiscal deficit. The FRBM target of lowering the fiscal deficit to 3% of GDP is sensible in good times, leaving scope for expanding it to 6.5% in a recession without causing a Greek tragedy. Second, Greece and Portugal have demonstrated that fiscal deficits in countries with structural problems can send the debt/GDP ratio skyrocketing without stoking growth. India has many structural problems despite having advantages too, and so should beware fiscal excesses. Third, Greece has shown that a monet...

If you look at the following assessment from Sumant Sinha, that looks quite probable: For many years China has been growing rapidly. Its stock market has been among the best performing in the world. On the back of a deliberately cheap currency policy China's exports have swamped the world. It will shortly cross Japan to become the world's second largest economy. Per capita income has almost trebled in the last 10 years. Infrastructure has boomed and the country is unrecognisable to those who revisit it after a gap of afew years. In many sectors China adds capacity in a single year equivalent to India's cumulative installed capacity. It has become the world's largest consumer of many commodities (and the world's largest polluter). By any measure, these are phenomenal achievements. And yet uneasy lies the crown. Much of the capacity that has been created is not being used. In sector after sector, there are excess capacities. The currency cannot be kept cheap forever a...