Indian budgets have supplied an invaluable public good, a stable democracy

It is not just RBI which has delivered stability but also Indian budgets which have delivered social and political stability through fiscal policy

Two days ago the RBI governor, Shakti Kanta Das, during his Nani Palkhiwala memorial speech, said a striking thing. Financial stability, he said, is a public good.

This is a new idea. Public goods in economics have two simple — but conflicting — definitions. One says that consumption of them by one person does not reduce their availability for another. The other says that the marginal cost of producing an extra unit of these goods is zero.

Both definitions are valid. But you can see the contradiction and choose the definition that suits your current purpose.

It’s worth pointing out here that it’s not just the RBI, which is in charge of monetary stability that has delivered stability. Indian budgets which are in charge of fiscal policy, have also done that: they have delivered two other types of stability: political stability and social stability.

Unnoticed by most people, Indian budgetary objectives have undergone a gradual transformation. And like it or not, it’s the politicians who have ensured this. Basically, they have turned the budget into an instrument of supplying the above two public goods which are absolutely essential for the survival of a stable, energetic and competitive democracy.

Without this, the conventional public goods like defence, justice, public order etc cannot exist in any meaningful way. This is true in an absolute sense of political stability and its carrier, a stable, energetic and competitive democracy. It is in this sense that our budgets have been very focused and successful.

Fundamental change

Between 1947 and 1970 the Budget didn’t have any political content. Money was raised and allocated for an entirely economic purpose. The second and third Five Year Plans were the result.

In 1970, however, Indira Gandhi and the Congress party turned it into an instrument of politics by changing its expenditure focus from growth to distribution. This was because the Congress had done badly in the 1967 general election. This change of budgetary strategy was a huge political success. So from then till 2014 budgets have stayed that way.

The BJP government and its new prime minister have retained that focus but changed the expenditure patterns. It remains an instrument of politics, however.

The social stability aspect has been what economists call a complementary good. For political stability you need social stability. Budgets since 1990 have targeted it relentlessly and created another public good.

There has been a lot of criticism of this approach to budgets because in economic terms the post-1970 budgets have been huge failures. Far too much public money has been wasted.

But this criticism is unmindful of an important fact: Indian budgets have also supplied an invaluable public good — a stable democracy via political and social stability.

The task before economics

Indian budgets have thus set economics a good problem to solve: how can their approach be incorporated into the formal discipline?

A beginning can be made by resolving the conflict between the two classical definitions given above. Indian economists, who rarely venture into theory, need to focus on this. Of the two definitions they have to tackle the marginal cost one first. That is, how can the provision of an extra unit political and social stability be done at zero marginal cost.

Western economists have focused on the institutions of democracy providing political and social stability. That’s important. But the development of institutions is not independent of funding. It’s here that the contribution of Indian budgets has been remarkable.

Not only have they funded the usual institutions, by focusing on political and social stability, they have created new public goods that are as, if not more, important than institutions.

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