"Government spending, Arthur Laffer observed, is taxation, and said that he had “never heard a poor person spending himself into prosperity ”. The distilled insight, though, has not dented the gusto of governments to spend their way out of crises—and often fund their way into power. Ostensibly the ideal is small government and efficient outcomes. In reality, governments believe size and spend matters and the veneer of a ‘balanced budget’ unravels in the columns of deficit and debt.
A week after the November 19 meeting of the RBI board, to define the contours of rights and entitlement between the central bank and the government, commentary continues to update the score on whether the government wrested the points or the RBI held its ground. The fact that a policy debate is seen as a war is a testimony to the trust deficit.
The crux of the matter is who will cough up the cost of clearing the swamp in the financial sector to prevent a systemic crisis. Last week, the Board and RBI agreed to delay the implementation of Basel III norms so banks could lend. The fact is, despite the forbearance, barely five of the public sector banks meet the stipulated capital adequacy ratio."
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