Accounting & Finance, Business & Management Studies

Depoliticize fiscal policy to tackle economic challenges

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Polarized political budgets make it extremely hard to take fiscal policy measures aligned with the economic interests of citizens, says the author.


Deepanshu Mohan, Associate Professor and Director at the Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, O.P. Jindal Global University, Sonipat, Haryana, India.


An observation of the effectiveness of central banking systems across the world reflects the limited extent to which monetary policy and lower interest rates are able to address cyclical, or even structural, downturns. Whether it is the US Federal Reserve, the European Central Bank, or the Reserve Bank of India, lower costs of borrowing or easier credit requirements introduced with other quantitative or non-quantitative measures have had minimal effects in pumping sustainable cycles of investment-production for higher growth in recent years. This has shifted responsibility to fiscal policy as a tool to boost demand, incentivize targeted lending, and pursue a pro-growth agenda.

For those aware of contemporary macroeconomics, including most monetarists, there is widespread agreement that a well-crafted and fine-tuned fiscal policy, especially in developing nations, can go a long way in filling a hole in the investment-production-consumption processes. However, in understanding the role of fiscal measures, one often understates how deeply politicized fiscal policies have become and hence fail to effectively substitute technocratic central banks that are tasked to ensure short-term economic stabilization.

The nature of politicization may differ from one state to another. In electoral democracies, budgetary spends are often directed towards populist schemes closer to election year knowing that the outcome of such spends may have little to do with driving growth or addressing immediate concerns. A party in power may do so to create a winnable political narrative or for a certain kind of self-projection.

Published in: Mint

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