A publicly transparent macroeconomic framework enables a discussion about economic features that goes beyond targets and empty slogans. It alerts the ecosystem to vulnerabilities caused by existing and upcoming economic constraints, and makes clear the trade-offs that economic decisions involve. It reduces room for bureaucratic discretion and idiotic policy pronouncements (RBI‘s ‘Budget is the seventh horse of the sun’ comes to mind).
When policymaking was disciplined and not decadently founded on slogans and pedestrian assertions, India had a macroeconomic framework housed in the Planning Commission. It took economic growth and changing sectoral composition (more manufacturing and high-end services, less agriculture and informal service) as aspirations. The savings rate and incremental capital output ratio were baselines that told us, along with a foreign exchange constraint, the boundaries within which different policies crafted to progress on these aspirations would work.
As time progressed, the core model remained a simple, essentially Keynesian, set of equations and accounting identities. The parameters shaping these, however, were influenced by changing economic doctrine and new methods. These incubated a range of econometric models and analytical initiatives in universities, think tanks and the private sector (CGE models, VAR analysis, macro-econometric and structuralist models), which were fed into the main model.
Results from these exercises, their technical competence and analytical plausibility were debated across the ecosystem. This was possible simply because they were publicly available. They were also reasonably idiot-proof, in the sense that anyone sounding off without a modicum of domain expertise was reduced to making ignorable WhatsApp Uncle type ‘What is the use of all this? We know the ground reality’ type of statements.
Macroeconomic analysis, even owned by government, is ideally never a monopoly. Typically, the government and the central bank have distinct macroeconomic frameworks. The latter is more focused on inflation and prices, and the former on real economic variables. Over time, there has also been a change in the ideology informing central bank models, which tended to drop Keynes for more Friedman, and then moved into fully empiricist dynamic stochastic general equilibrium (DSGE) modelling.This is apparently the approach RBI currently uses, but seems too insecure to make its modelling publicly available. It, therefore, serves little purpose other than to make the comments of the generalist governor of the day sound as if they were based on some technical thinking.With the demise of Planning Commission, there is no analytical capacity left in GoI. The Economic Surveys are largely competent exercises in economic geography, accompanied by reflective disquisition into topics that are the flavour of the year. This is not a bad thing. Economic geography is essential to have an economic map, for pointers to emerging issues and to keep a reality check. But it’s no substitute for a macroeconomic framework.
In these uncertain domestic and global times, this is unacceptable. We need to get serious about macroeconomic policy. A public, government-owned, macroeconomic framework that addresses the following questions is essential for India:
- What is India’s aspirational GDP growth rate in 2030 (not 2047)?
- What rate of savings and investment will it take to achieve this growth rate?
- If achieved, what will be the share of manufacturing, services and agriculture in GDP?
- What will be the unemployment rate?
- Will the informal sector be smaller, larger or the same as today?
- How will trade restrictions constrain achievement of the desired growth rate?
- Will total government expenditure as a percentage of GDP rise, fall or stay the same?
On its part, RBI would be well-advised to make public its own macro framework, which should focus on addressing the following questions (again, for 2030, not 2047):
- (Since it uses output gap modelling) How does RBI calculate the potential output of India?
- Will reducing fiscal deficits reduce inflation or not? If so, how, and by how much?
- How do changes in the repo rate transmit to agricultural prices?
- In the Indian context, how exactly do inframarginal changes in the repo rate (25-50 bps) impact the output gap and, therefore, inflation?
- Is India expected to maintain the same current account deficit/GDP ratio through to 2030? If so, what are the implications for the exchange rate?
- What is the ideal path of stable depreciation that can be expected, based on CAD expectation?
There is plenty of Indian domestic and global talent to undertake these exercises. But there must be an executive political decision to deliver such a framework. This will provide India with an evidence-based, analytically-grounded strategic economic direction that will be far more comforting and results-oriented than empty slogans, meaningless soviet-style targets, and empty talk about 2047.
