Economy

The Free Lunch Theory, aka as Modern Monetary Theory, is finally getting its refutal. With $30 trillion national debt heading towards $40 trillion and an out of control inflation it is hard to defend the theory with a straight face any more. It reminds me of stagflation of seventies that eventually required harsh monetary policy of eighties to bring order to the economy. Free spending to provide free every thing for all doesn’t pass the smell test. We have spent $20 trillion in deficit spending in last 12 years. It eventually had to show up in prices.

Jimmy Carter was a one term president because of that stagflation. Let that be a cautionary note to Joe Biden!

https://www.nytimes.com/2022/02/06/business/economy/modern-monetary-theory-stephanie-kelton.html?smid=li-share

India received more than $100 billion of foreign aid between 1950 and 1990. Foreign aid was the only source of foreign currency as India did not have much to export that world wanted. Aid India Club met annually in Paris to make commitments so India would know how much to expect. Foreign currency was tightly controlled hence FERA and FEMA and famous $8 men, of which I am one.

Foreign Aid was the worst possible thing that could have happened. It enabled bad economic behavior to last far longer than would have been possible. It was the economic crisis of 1991 that forced the hand. Now, India has a close to a $500 Billion in foreign currency reserve. India has an IT industry of almost $300 Billion dollars.

1991 liberalization only dismantled the extremes of the license/permit Raj. Vajpayee government got back to liberalization when finance sector, aviation sector, automobile sector and telecom sectors were liberalized. The results were spectacular.

There is a lot more liberalization yet to be done. For India to emerge as an economic powerhouse it needs to back to that agenda.

The Free Lunch Theory

Foreign Aid

India’s Prime Ministers

Rajiv Gandhi

Summer of 1968

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