Macroeconomic target setting has now become a joke and needs review

The time has come to start questioning this target setting business. Since 2009 these targets for financial stability have become a joke everywhere.

During Budget time there is a lot of chatter about macroeconomic targets. Coronavirus (Covid-19) has brought these targets into very sharp focus this year because in the last two years they have all gone awry, all over the world.

India has been struggling with targets and targeting since the 1991 crisis. Since then it has been setting targets every year for all sorts of things like the fiscal deficit, the inflation rate, employment and GDP growth rates and the exchange rate. No one one takes these seriously.

For example, Budget 2021-22 had set a fiscal deficit target of 6.8 per cent against the 2020-21 revised estimate of 9.5 per cent.

A story in this newspaper says this steep decline is not going to be achieved. No one is losing any sleep over it.

Meanwhile, the CPI inflation target for the RBI is around 6 per cent which is the upper limit of the range of 4-6 per cent. It’s likely that inflation will be higher.

Hence the question: where did these targets come from? The answer is the IMF. So I want to ask “Who gave the IMF the right to define macroeconomic targets?”

Think about it: until about 1985 the world got along just fine without targets for fiscal deficits, inflation, employment etc. These were managed without the help of ‘targets’. Then suddenly, in response to the Latin American debt crisis

the IMF started inventing these targets.

It said 3 per cent was the appropriate target for the fiscal deficit and 2-3 per cent was the appropriate range for inflation. It also said the unemployment target would need to be 6 per cent. It was whispered around the pub that a greater than 15 percent depreciation in the exchange rate of a currency in a year could be construed as ‘rate manipulation’. And so on. You get the point.

Targets are not a bad thing to have. Everyone has them. For countries they are useful because they tell them what needs to be done.

Nor is the notion of national level targets new. After all, the Soviet style five-year plans were all about targets.

But there was an important difference. They were microeconomic targets. So much steel, so much coal, so much electricity, so many roads etc.

But then the IMF started these macroeconomic targets and invented one-size-fits-all macroeconomic targets. Because of the legitimacy it enjoys, when the IMF says something, it gains worldwide acceptance.

However, as we come to the end of the first quarter of the 21st century now, I want to ask two questions. One, whose interests do IMF targets really serve and, two, why can’t each country set its own targets. After all that is what happens in trade deals.

The IMF seeks to ensure ‘global financial stability’ — which is actually code for the financial stability of the West as represented by Wall Street and the City of London. It is all in the interests of American and British capital, now topped up slightly by Chinese capital. The Russians and the Arabs are the also-rans.

The concept of financial stability is a hold-all concept that encompasses all sorts of sins. But these sins can be committed only by countries other than the US and the UK because, financially, these two countries are enormously strong. They can wreck economies, as indeed they have done in the past.

That’s why the time has come now to start questioning this target setting business. Since 2009 these targets for financial stability have become a joke everywhere, not least in the countries whose interests they were invented to protect.