Wednesday, October 9, 2019

MMT: Modern Monetary Theory ....Introduction


Full Employment & Price Stability, which is at the heart of MMT, 
could be achieved by Governments, 
       if only they understand how monetary system really operates          
under the current fiat money regime.
Different monetary regimes have different operational realities.

Yes, it could be achieved by Governments issuing their own fiat currency, provided they understand how money gets created and how monetary system really operates in a fiat money system. It is very critical that it is fiat currency, not gold standard or foreign-currency standard.

Having never let money play an explicit and prominent role in their theories for decades, orthodox economists completely missed the significant shift in money creation and monetary operation when fiat money system was quietly ushered-in, failing to realize that the currency issuer under a gold standard has different operational realities than the currency issuer under fiat money system and a central bank under gold standard has different operational realities than a central bank under flexible exchange rate.

READ MORE .......

MMT: Modern Monetary Theory: Further Reading.....Policy Proposal:

Policy Proposal:

Let us see MMT in detail below.

MMT introduction given above is the necessary pre-read.

Full employment, price stability, meeting the basic needs to ensure a decent living condition for all and sustainable, environmentally sensitive development should be the economic objective for any country; otherwise, it is meaningless for a Government to regulate the economic and livelihood activities which were running on its own. Delivering without fail on those objectives are what a Government is meant to do, particularly when it provisions itself by transferring resources from the non-Govt sector and it is possible for a monetary sovereign country.

Taxation creates unemployment (Taxation is the intervention that creates unemployment by design for the further purpose of the state being able to hire those it's tax caused to be unemployed. Residual unemployment is the evidence that the tax liabilities created more unemployed than the Govt hired. The JG works to transition the unemployed back to private sector employment and optimize output - Warren Mosler) and it is extremely difficult to determine the quantum of Govt spending necessary to reverse the unemployment, JG is the only option.

MMT: Modern Monetary Theory: Further Reading.....Policy Proposal continues.....

MMT: Modern Monetary Theory: Further Reading.....

Policy Proposal continues.....

As core industries are the basis for all the economic activities, self-sufficiency in those industries should be a focus area. Food and water sovereignty are the two most important targets. Job guarantee program could play a major role in these two sectors.

India is the second largest producer of crude steel in the world and the third largest consumer of the finished steel after China and USA, however, its per capita consumption is only 69 kg as against the global average of 214 kg. With huge investments in infrastructure and construction sector, steel demand and corresponding consumption is expected to grow at an average of 7.4 per cent. This will lead steel production to go up to 255 million tonnes by 2030 and per capita steel consumption to 160 kg.

Warren Mosler:
Selected posts from @wbmosler:

"Taxation is the intervention that creates unemployment by design for the further purpose of the state being able to hire those it's tax caused to be unemployed.  The JG works to transition the unemployed back to private sector employment and optimize output".

"Assuming Gov is fully provisioned, it can 'correct it's mistake' by lowering the tax until they return to the private sector.  The JG promotes that transition from unemployment to private sector employment because employers don't like to hire the unemployed, etc. etc".

"The govt. created unemployment, by design, by imposing tax liabilities, for the further purpose of provisioning itself by spending it's otherwise worthless currency.   Residual unemployment is the evidence that the tax liabilities created more unemployed than the gov hired".

"Gov. spending is the awarding of tax credits.  If you call that 'printing money' then taxing is 'unprinting money' as it is the redemption of those tax credits.  So if you're looking for redemption, pay your taxes...  ;)".

"It's about sufficient deficit spending- public + private- to offset desires to not spend income".

"MMT only has the understanding of the source of the price level. Govt is the price setter & what that means is price level is necessarily the prices paid by Govt when it spends or collateral demanded when it lends. But, the Govt thinks that the dollar comes from the private sector and there is no other option but to pay market prices for everything they buy; what happens during these is market prices start coming up which normally would be an one-time event that would reverse if the Govt do not pay those higher prices, but when the Govt pay more for the same thing, then the price remains at that level".


Randall Wray:
Selected posts from Randall Wray:

"Currency creation through spending comes first. But how can the treasury spend first, since it needs deposits (at the central bank) to avoid bouncing checks? Central banks are generally prohibited from providing overdrafts. Hence, they worked out procedures to ensure that the treasury obtains deposits through sales of bonds that are purchased by banks using either overdrafts or borrowed reserves supplied by the central bank. This serves effectively as an end-run around the “no treasury overdraft” rule. Once the treasury spends, bank reserves are replenished. If banks don’t want to hold bonds, they can be sold to the central bank in secondary markets. However, banks normally do not want excess reserves created by government spending, so they willingly exchange them for (higher) interest-earning bonds. 

Normal Fed operating procedure ensures banks always get the reserves they need to buy bonds—which allows the Treasury to get the deposits it needs in its account at the Fed. Furthermore, Treasury doesn’t have to issue any bonds, as rules can be changed to allow overdrafts at the Fed. In that case, the Fed can still maintain a nonzero interest rate target by paying interest on reserves (as it has done since the global financial crisis), rather than using bonds as the interest-earning alternative to keep the fed funds rate up in the presence of excess reserves."

"A key insight of MMT is that bond sales by the treasury or the central bank are functionally equivalent operations. The conventional view is that treasury sales are a borrowing operation while central bank sales are an open market operation, but in either case the functional impact is to withdraw reserves from banks. Government spending puts reserves into the banking system and the reserves can only leave the system through bond purchases, tax payments, or cash withdrawals from deposits. Cash withdrawals are normally small (with seasonal variability); national government taxes are large but with temporal variation and are usually—for most countries—significantly lower than sovereign government spending. To avoid wide fluctuations of reserves and to deal with net reserve accumulation due to government spending in excess of tax payments as well, the central bank and treasury coordinate bond sales to drain excess reserves. For this reason, MMT sees bond sales as part of monetary policy operations—whether undertaken by the central bank or by the treasury."

"A sovereign government cannot run out of currency. Major central banks demonstrated this with QE, as they “keystroked” trillions of dollar, euros and yen as payment for large-scale asset purchases. They could just as easily “keystroke” reserves to banks to allow the treasury to spend".
Bill Mitchell:
Fadhel Kaboub:
Mathew Forstater:
Scott Fullwiler:
Stephanie Kelton:
Pavlina R. Tcherneva:
Eric Tymoigne:
MMT history and overview

What is Money? by A. Mitchell Innes

Modern Money Theory 101: A Reply to Critics

Heterodox Views of Money and Modern Monetary Theory by Phil Armstrong

Flow of Money - Sectoral Balances

Sectoral balances and permanent fiscal deficit

Flow of Money - Revisited


MMT: Modern Monetary Theory ....Introduction


Full Employment & Price Stability, which is at the heart of MMT, 
could be achieved by Governments, 
       if only they understand how monetary system really operates          
under the current fiat money regime.
Different monetary regimes have different operational realities.

Yes, it could be achieved by Governments issuing their own fiat currency, provided they understand how money gets created and how monetary system really operates in a fiat money system. It is very critical that it is fiat currency, not gold standard or foreign-currency standard.

Having never let money play an explicit and prominent role in their theories for decades, orthodox economists completely missed the significant shift in money creation and monetary operation when fiat money system was quietly ushered-in, failing to realize that the currency issuer under a gold standard has different operational realities than the currency issuer under fiat money system and a central bank under gold standard has different operational realities than a central bank under flexible exchange rate.

There are two competing approaches to money, with the orthodox approach dominating most research and policy formation to the virtual exclusion of the other. Historical evidence on the origins of coins and money seems to conflict with the dominant approach to money, against the neglected chartalist approach to money.

“Inconvenient as barter obviously is, it represents a great step forward from a state of self-sufficiency in which every man had to be a jack-of-all-trades and master of none….If we were to construct history along hypothetical, logical lines, we should naturally follow the age of barter by the age of commodity money. Historically, a great variety of commodities has served at one time or another as a medium of exchange: …tobacco, leather and hides, furs, olive oil, beer or spirits, slaves or wives…huge rocks and landmarks, and cigarette butts. The age of commodity money gives way to the age of paper money…Finally, along with the age of paper money, there is the age of bank money, or bank checking deposits.” (Samuelson 1973: 274-5)

“The modern state can make anything it chooses generally acceptable as money. It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done. Everyone who has obligations to the state will be willing to accept the pieces of paper with which he can settle the obligations, and all other people will be willing to accept these pieces of paper because they know that the taxpayers, etc., will accept them in turn.” (Lerner 1947, p. 313)

"The central idea of the alternative view is that the value of money is based on the power of the issuing authority, and not by any embodied or backing precious metal. Hence, Chartalists give a central role to the state in the evolution and use of money. For the most part, this evolution is not linked to reduction of transactions costs of exchange. Rather, the evolution of money is linked to the needs of the state to increase its power to command resources through monetization of its spending and taxing power."(Randall Wray, 2000) The critical point is that governments impose fees, fines, and taxes to move resources to the government sector, and that for many thousands of years, governments have imposed these liabilities in the form of a monetary liability.

Minsky argued “the fact that taxes need to be paid gives value to the money of the economy. [T]he need to pay taxes means that people work and produce in order to get that in which taxes can be paid.” (Minsky 1986, p. 231)

The monetary system, itself, was invented to mobilize resources to serve what government perceived to be the public purpose.

"Understanding how monopoly money works would advance public policy formation a great deal. Unfortunately, government, usually, does not recognize it operates monopoly money, believing that money was an invention of private markets and it must pay “market determined” prices-whatever that might mean. Unemployment and inflation are the results of this misunderstanding."(Randall Wray, 2011)

A Job Guarantee (JG) model, which is central to MMT, is a key policy tool to resolve both inflation and unemployment. Therefore, given the right level of government spending and taxes, combined with a Job Guarantee program, MMTers state emphatically that a nation can achieve full employment along with price stability.  

The constraint is real resources a nation can command, not monetary. The available resources (goods and services) that are for sale in the currency of issue define how much fiscal space the government has in a fiat money system, millions of workers in need of jobs, capital equipment lying idle, natural resource inventory and other productive resources looking for a buyer (user). That is what fiscal space relates to in a modern monetary economy.                                                                                                                                       

Modern Monetary Theory is a description of how the monetary system actually works and a set of policy proposals that arise from this description; fiat money system is what is prevalent in most of the countries presently, as they moved away from gold standard after Bretton Woods System collapsed, when United States unilaterally cancelled the direct convertibility of the United States dollar to gold in 1971 under President Nixon.

MMT is more descriptive of monetary operations than prescriptive of policy; it describes how money & monetary system operates. From this description, a set of policy proposals are derived. Differentiating a currency issuer from a currency user goes to the heart of MMT. The tremendous advantage a currency issuer has in a fiat money system  was missed by almost all the policy makers, the subtle shift under fiat currency made a huge difference to the way money gets created and operates and so to policy making.

Understanding the monetary system and knowing exactly how it really works is the prerequisite for a policy maker (including how money is created by Govt, how Govt spends money into existence and taxes it out of existence, how money is created with a keystroke (as stated by Ben Bernanke & Alan Greenspan), how Govt creates currency to provision itself, how Govt spending is not restricted by revenue from the day fiat money is adopted, how Govt spending is whatever the Govt chooses it to be, how Govt borrowing is not to meet its spending but to drain excess reserves from the banking system to support overnight interest rate, how deficit spending provides equity that supports the entire credit structure, how Govt being money monopolist could set the price and inflation, how trade deficit could be made beneficial if the importing nation insists that the import should be in its currency, how Central Bank acts as the ’lender of last resort’ and how reserves are added and drained).

The above facts got opened up to the world when Warren Mosler dared to look at the monetary system without the assumptions associated with gold standard.

Any policy maker has to first understand, how a monetary system operates and then it opens up plethora of policy options which was not seen as possible otherwise.

Monetary system under fiat currency is vastly different from monetary system under gold-standard. Monetary regime under a gold standard, a system in which arguably the government was required to tax or borrow to fund government spending, is different, highly restrictive and limited in its scope. Quantity of money creation was restricted by gold-holdings in gold-standard; monetary system under fiat currency doesn't have that restriction and opens up opportunities for a Govt to deliver its responsibility to serve the economic needs of all its citizens; it is the Govt which declared a paper as currency & tax-credit and imposed tax liability in that currency on all its citizens to provision itself and created unemployment in the process (Before money, tax-liability and other economic controls imposed by Governments, people were directly producing their needs and they were not 'unemployed', except in slavery).

Income-tax & corporate tax are not the only taxes, there is tax on every product and service we consume, even on safety-pin & salt; so, every citizen is a tax-payer. Let it be reiterated again, to provision itself only, Govt declared a paper as currency & tax-credit and imposed tax liability in that currency on all its citizens. That is, Govt creates a currency system to provision itself, as it has been happening from the days of kingdoms and invaders (India is estimated to have lost $45 trillion to British Empire through taxes and other economic terms set by them). Meaning, Govt takes (purchases) products, labour and other services from its citizens in exchange for a paper it declares as currency and tax-credit by imposing tax liability in that currency.

We are not meaning in any way, currency is not valuable for the user. Obviously, it is valuable being a tax-credit and the only monetary unit of account, the basic building-block of the economy. But, for the issuer, it is a means to provision itself.

It is clear, taxation for a currency-issuer is not for revenue, it is to make every citizen liable in a currency in which tax is imposed, so that they need to work for that tax-currency; in that sense, they are all unemployed by design. Then, they offer, directly or indirectly, labour, product and other services to earn the tax-currency. The structure evolved is, by declaring a paper as currency and tax-credit and imposing tax liability in that currency, Govt provisions itself. In the process, if the Govt doesn’t employ everybody, it means that its spending is not enough to cover all its citizens, as the tax has created more unemployed and the evidence is unemployment. In this provisioning structure, role of private sector is inevitable and necessary.


Govt imposing tax liability on all its citizens and not resolving the unemployment its taxation creates cannot be justified on any ground and it is against the spirit of social contract and so Govt is  responsible to resolve it. Private sector being a necessary and inevitable part of this structure, productivity of all its constituents has to be ensured. So, Govt has to be the employer of last-resort by providing transition jobs till the private sector could employ most of them, to repair the damage it caused by under-spending. Job Guarantee providing transition jobs is the solution to facilitate unemployed people's transition back to the private sector.

Introductory material on MMT:




MMT: Modern Monetary Theory: Further Reading.....Policy Proposal:


Policy Proposal:

Let us see MMT in detail below.

MMT introduction given above is the necessary pre-read.

Full employment, price stability, meeting the basic needs to ensure a decent living condition for all and sustainable, environmentally sensitive development should be the economic objective for any country; otherwise, it is meaningless for a Government to regulate the economic and livelihood activities which were running on its own. Delivering without fail on those objectives are what a Government is meant to do, particularly when it provisions itself by transferring resources from the non-Govt sector and it is possible for a monetary sovereign country.

Taxation creates unemployment (Taxation is the intervention that creates unemployment by design for the further purpose of the state being able to hire those it's tax caused to be unemployed. Residual unemployment is the evidence that the tax liabilities created more unemployed than the Govt hired. The JG works to transition the unemployed back to private sector employment and optimize output - Warren Mosler) and it is extremely difficult to determine the quantum of Govt spending necessary to reverse the unemployment, JG is the only option.

So, if Govt understands how money gets created in a fiat money system and how monetary system really operates, then it could fully deploy its human resources in its productive function.

What is monetary sovereignty? When a country has exclusive authority to issue and retire its own currency, it is monetarily sovereign. Also when it taxes its population in that same currency (which incidentally retires the currency), issues debt denominated only in its own currency and doesn’t fix the value of its currency to a foreign currency or a commodity like gold (In other words, monetary sovereign governments don’t follow the gold standard or fixed exchange rate regimes), it satisfies the definition of monetary sovereignty.  Plenty of nations do that. 

Money gets created by a keystroke when Govt spends (as stated by Ben Bernanke & Alan Greenspan) and a bank lends (Bank of England: money creation in the modern economy) (Deutsche Bundesbank: The role of banks, non-banks and the central bank in the money creation process); as long as real resources are available to purchase, money created these ways will not lead to inflation; however, Govt doesn’t have to pay higher prices to purchase what it wants. Prices paid by Govt define the value of currency. It’s a simple case of monopoly. Govt being money monopolist could set the price and inflation (Warren Mosler: Government Is Money Monopolist, Therefore It Sets The Price).

Govt declares a paper currency as money unit of account and then imposes tax, payable only in that currency and Govt is the monopoly issuer of that currency; now, that currency has to be earned, directly or indirectly, from Govt by selling labour, products and other services to the Govt; it implies that the tax-liability has created unemployment. This is how the cycle operates and Govt necessarily spends, as provisioning itself is the reason for the entire exercise. Unemployment created by tax-liability and employment generated by Govt spending may not match most of the time. Once the provisioning cycle is over, if there is unemployment, it is an evidence that Govt spending is inadequate to reverse the unemployment created by tax-liability.

Private sector is the mainstay of the economy of a country and significant provider of employment. For the private sector, profit maximisation is the driving force, but for the public sector, social and strategic objective is vital. Important and inevitable roles of public sector are planned development to ensure economic sovereignty to the extent possible, building the basic infrastructure, maintenance of the infrastructure created, ensuring balanced regional growth, bridging the gaps in industrial structure, operating critical minimum capacity in essential sectors all the time at any cost, counter-balancing the monopolies, investing to attain food, energy & technology sovereignty, keeping buffer-stock of essential commodities, playing the role of stabilizer at the time of glut and shortage and creating financial & distribution infrastructure and access to every citizen. The above are the critical functions of the public sector. Both sectors are vital to the economy and mostly are complementary. Public sector should also act as counter-cyclical stabilizer, which is a critical role. Obviously, these roles cannot be driven by profit motive and the fiat monetary system suits this perfectly.

Provisioning the Govt is met by non-Govt sector - the individuals, enterprises and corporates. Private Sector plays a significant role being major part of economic activities. So, private sector is the major employer. As the Govt controls and sets the terms of economic and livelihood activities (including how much of real resources (products, labour and other services) is surrendered to public domain by private in exchange for what it calls as currency, get that currency back as tax and extinguish it, how much surplus spending to incur to increase the money supply and savings at the hands of people which acts as equity to the entire credit structure, that way being responsible for credit money creation) and creates unemployment by imposing tax-liability, it has to provide the transition job till private sector could absorb them. The provisioning structure also requires the non-Govt sector to be productive.

Private sector's utilization of human resources expands or shrinks dependent on market condition; public sector should play counter-cyclical role, acting as employer of last resort, releasing the productive capacity of a nation at all times; Govt being the currency-issuer and price-setter, public sector can act as buffering and stabilizing anchor in any market condition; as Govt is the monopoly currency-issuer, it cannot abandon this duty to the market forces. Markets operate within the institutional structure set by the monopolist.

Having created unemployment through taxation, Govt has to offer a job guarantee program providing transition jobs, automatically increasing government employment and spending whenever jobs are lost in the private sector, and decreasing government jobs and spending whenever the private sector expands. JG Program, for a country like India, offers a massive productive opportunity to create the lacking basic infrastructure throughout the country, which will lay the foundation for growth and well-being through out the country, encompassing all its citizens.

JG could be utilized to create comprehensive public infrastructure to make each village & state self-reliant with respect to basic needs and at the national level in all sectors; an institutional structure from the national to village level, on the lines of MGNREGA, has to be in place (if there is one Job Guarantee Program in any part of world which is functional, effective and vast, it is MGNREGA; it is the largest JG program in the world; the institutional structure in place implementing MGNREGA could be the base for the JG program); complete overhaul of all the policies and frameworks is necessary to reflect the operational realities of fiat monetary system.

Enormous benefits available to a currency-issuer would be lost if it is not backed by institutional structure based on exact understanding of monetary operation. Almost total dependence on own currency and minimal dependence on foreign currency for imports should be the policy goal. Self-reliance in all sectors, large investment in import-substitution and energy-independence, technology independence and food self-sufficiency have to be accomplished; indigenous payment system and communication infrastructure have to be established. To achieve the above, both public and private sector have to play their part. For Central Govt and its Undertakings, there is no financial limitation, as explained above, for investment. But State Governments, Municipalities and State Undertakings are not currency issuers. So, they should be provided with loans at 0% interest or grants for the same. To achieve the above, monetary resource and human resource are not constraints for India. With respect to natural resources, it has to be sensitive to the environment.

Most of the developed countries were invaders at one point in time and continue to do so directly or indirectly. Internally, the advantaged are the beneficiaries of institutional structure at the cost of vast majority, but shamelessly justify ‘might is right’. Globally and locally, we need to admit, world only has limited common resource meant for all of us, including trillions of other beings which acting together make living possible in this part of the universe. At the rate exploitation and depletion of natural resources is happening (including the critical water resource), the damage could be irreversible and we may be forced to cut-down abruptly. But, as usual, we will not respond to this caution. The option is, Govt to focus on creating basic infrastructure to meet decent living standards for all its citizens as a primary function and then on other development goals, but even this has to be segregated responsibly, keeping the exigencies in mind.

Possible employment and investment options under JG:

India is blessed with huge human resources, very large market and vast infrastructure to be built all over the country – an ideal platform for (applying) policy options derived from the understanding of monetary operations in a fiat money system.

Vital role of public sector: Private sector being driven by profit maximisation cannot serve the public purpose; many years of market economy has widened the disparity massively, leaving billions of people vulnerable; Govt being the monopoly currency-issuer and the one which controls and sets the terms of economic activities, it cannot abandon this duty to the market forces; the way the structure is set up, public sector has to be the lead player in providing the basic services and infrastructure to people and also in the critical and strategically important sectors. Being the money monopolist, nothing comes in the way of the Govt to provide basic and essential services to people and ensure functioning of critical and strategic sectors, at all times, even during recession and exigencies like wars or natural disasters including climate catastrophe. So, Govt has to segregate the economic activities in to three segments: essential basic services to its citizens, critical & strategic functions and other economic activities; and then be the lead and dominant player in the first two segments.

We are hanging on to the uncertainty of climate damage for not acting on that; if it happens, then it will be catastrophic for the entire world, particularly to the vulnerable segment of people; even if it doesn’t happen, there is nothing wrong absolutely about responsible and sustainable development; at the time of climate emergency, we may have to halt all our economic activities; instead of that, if Governments segregates their economic activities as suggested above, then during climate  emergency, the basic essential functions and the critical and strategic functions could be continued, so that the vulnerable segment, which would have got affected badly, will be protected and others also would get the basic services.

What are these three segments?

Essential & basic services: It means ensuring basic essential living condition to every citizen, covering water, food, shelter, healthcare and education. Job Guarantee Program could be utilized to create all the assets necessary to make these basic services available. As this doesn’t put free money in the hands of people, without creating any productive asset or services, it will not lead to excess money chasing fewer products. 
Target areas are: piped water supply to every household (barely 18 per cent of India’s rural households have access to piped water, out of 178.7 million total rural households), increasing irrigation capacity, water conservation, recharge and storage using traditional methods, utilizing all possible means to store as much water as possible, to ensure food-security and greater income in the agriculture sector on which 65% of the population depends.

Food Park at every village affiliated to an Agricultural University which will be under an umbrella institution at the State & National level, cultivating, processing, storing and supplying grains, vegetables, fruits and other food products including milk (both at the regional and national level, it will be a coordinated & planned operation, as shown by Verghese Kurien, the 'Father of White Revolution', to achieve many objectives like controlled production to avoid excess supply, value-addition, profitable operation, farm-to-fork supply-chain to benefit both the farmers and consumers, food-security, nutrition-security and increased intake of fruits & vegetables in food). Seed preservation, support to organic farming, stubble conversion (stubble burning causes huge environmental problem), water management (including rain-water harvesting & run-off river water storage in ponds, barrage, dams and ground-water recharge), warehouse, cold-storage, food-processing, marketing assistance, assistance in contract-farming, end-to-end financing and insurance could be part of the food park activities.

Similar comprehensive programs have to be structured in housing, healthcare and education to make them available to every citizen.

Critical and strategic infrastructure: Critical sectors means sectors which are critical to the nation and whose incapacity or destruction will have a debilitating impact on national security, economy, public health or safety.

Strategists have identified different categories of sectors that are considered to offer vital services and thus require protection. These are the core sectors and possibly the areas where a large-scale interruption would be most devastating:

Energy: electric power, gas, and oil
Food: food supply, and food safety
Water supply
Critical manufacturing
Chemical and nuclear industry: transport, storage, production, and processing of dangerous materials
Transportation (air, surface, rail & water)
Banking & Finance: payments (bank retail) and financial transfers by the Administration
Telecommunication Infrastructure
Defence 
Space
Law enforcement, security & intelligence
Sensitive Government organisations
Public Health: hospital and rural care, medicines, and vaccines
E-Governance

As the above functions are critical for the well-being and safety of the nation, it cannot be run with profit alone as the motive and so public sector has to play a major role or at least control critical capacity in these sectors.

Other economic activities: Economic activities, other than essential basic services and critical strategic functions, will come under this. Unlike the above two essential segments which have to be run at all times, recession or otherwise, other economic activities which is almost totally under private sector, will expand or shrink in response to market condition.

As most of the manufacturing and service industries would come under this, what is the best strategy for growth in this segment? “India’s GDP momentum sustained 7% growth for several years due to big expansion of roads, electricity and telecom to rural areas that boosted internal trade between states, producing the economic gains that small countries can gain only from international trade. But now over 90% of the country has roads, electricity and telecom, so further gains are tapering off. Also, in the 2000s, India produced three world-class industries — software, automobiles and pharmaceuticals. But in the 2010s, it hasn’t produced a single new world-class industry” - Swaminathan A Aiyar, TOI. To have similar or superior impact on economy and people, rather than groping in the dark for probable means, job guarantee program itself could become the means and around it, projects could be structured to develop the essential basic infrastructure, the critical and strategic infrastructure, other economic activities to support those infrastructures and additional economic activities possible during expanding economy, without causing damage to environment and over-exploitation of resources.

As stated earlier, self-reliance in all sectors, large investment in import-substitution, energy-independence, technology independence and food self-sufficiency have to be accomplished; indigenous payment system and communication infrastructure have to be established. As exports are cost to the economy, focus on it could only be to the extent of foreign currency needed for import; otherwise, we should strive to import paying our own currency.

As described in detail, understanding how monopoly money works would advance public policy formation a great deal. Unfortunately, government, usually, does not recognize it operates monopoly money. Once the policy makers understand that the currency is created through spending by a currency-issuer (meaning, there is no separate currency printing or creation before spending; Govt, being a currency-issuer, creates currency as it spends) and in a fiat currency system, tax is not a revenue for a currency-issuer, Govt creates money and imposes tax to provision itself, Govt is the price setter & the price level is necessarily the prices paid by Govt when it spends and the so-called ‘deficit-spending’ only provides savings and equity to the non-Govt sector that supports the entire credit structure, then the twin-issue of monetary-resources and inflation are addressed and the quantum of Govt spending is whatever it chooses it to be.


MMT: Modern Monetary Theory: Further Reading.....Policy Proposal continues.....


MMT: Modern Monetary Theory: Further Reading.....

Policy Proposal continues.....

As core industries are the basis for all the economic activities, self-sufficiency in those industries should be a focus area. Food and water sovereignty are the two most important targets. Job guarantee program could play a major role in these two sectors.

India is the second largest producer of crude steel in the world and the third largest consumer of the finished steel after China and USA, however, its per capita consumption is only 69 kg as against the global average of 214 kg. With huge investments in infrastructure and construction sector, steel demand and corresponding consumption is expected to grow at an average of 7.4 per cent. This will lead steel production to go up to 255 million tonnes by 2030 and per capita steel consumption to 160 kg.

Indian textile industry, the second largest manufacturer and exporter in the world, contributes 12.65 per cent to manufacturing and 2.3 per cent to GDP. India has a share of 5 per cent of the global trade in textiles and apparel. During 2018-19, the share of textile and clothing in India’s total exports stands at a significant 12 per cent. The sector is the biggest employer after agriculture employing 4.5 crore people directly and another 6 crore people in allied sectors. Apparel also plays a critical role in improving social dynamics as mostly women are employed in the sector. Above all, the backward linkages of the sector to the rural economy give huge opportunities to millions of farmers, artisans, handloom and handicraft manufacturers. The sector is perfectly aligned with Government’s key initiatives viz., Make in India, Skill India, Women Empowerment and Rural Youth Employment.

The Micro, Small and Medium Enterprises (MSME) sector in India plays a crucial role by providing large employment opportunities, industrialization of rural areas and reducing regional imbalances.

The installed capacity of power generation has increased from 344 GW in 2018 to 356 GW in 2019. This is expected to increase to 1100 GW by 2050, the substantial part of additional capacity coming from renewable including hydro energy.

National Water Grid: Water is the most critical need for survival; that is how human settlements have evolved near river basins, with settlement density decreasing exponentially with distance upstream and intense concentration within small areas, raising concerns about sustainability.

India faces a turbulent water future. Last year, many parts of India faced severe drinking water problem. The current water development and management system is not sustainable: unless dramatic changes are made—and made soon—in the way in which government manages water, India will not have the water required for the economy and for people in the near future (World Bank Report).
India has a highly seasonal pattern of rainfall, with 50 percent of precipitation falling in just 15 days and over 90 percent of river flows in just 4 months. Throughout history, people have adapted to this variability by either living along river banks or by careful husbanding and management of water. Until the 19th century, most of this management was at the community level, relying on a plethora of imaginative and then-effective methods for harvesting rainwater in tanks and small underground storages (World Bank Report).

Over the past 150 years, India has made large investments in large-scale water infrastructure, much of which brings water to previously water-scarce areas. This has resulted in a dramatic economic shift, with once-arid areas becoming the centres of economic growth, while the historically well-watered areas have seen much slower progress. For the most part, the results of this ‘hydraulic infrastructure platform’ have been spectacular both nationally (through the production of food grains and electricity, for example) and regionally (where such projects have generated large direct and equally large indirect economic benefits). The poor have benefited hugely from such investments. The incidence of poverty in irrigated districts is one-third of that in un-irrigated districts (World Bank Report).

India can still store only relatively small quantities of its fickle rainfall. Whereas arid rich countries (such as the United States and Australia) have built over 5000 cubic meters of water storage per capita, and middle-income countries like South Africa, Mexico, Morocco, and China can store about 1000 cubic meters per capita, India’s dams can store only 200 cubic meters per person. India can store only about 30 days of rainfall, compared to 900 days in major river basins in arid areas of developed countries. A compounding factor is that there is every indication that the need for storage will grow because global climate change is going to have major impacts in India—there is likely to be rapid glacial melting in coming decades in the western Himalayas, and increased variability of rainfall in large parts of the subcontinent. There are regions of India that will benefit greatly from increased investment in water infrastructure, of all scales. (World Bank Report).

A review of India’s hydropower infrastructure reveals a similar picture: whereas industrialized countries harness over 80 percent of their economically-viable hydropower potential, in India the figure is only 20 percent, despite the fact that the Indian electricity system is in desperate need of peaking power and despite the fact that Himalayan hydropower sites are, from social and environmental perspectives, among the most benign in the world. Especially in the water-rich northeast of the country, water can be transformed from a curse to a blessing only if major investments are made in water infrastructure.  In many parts of the country there are also substantial returns from investments in smaller-scale, community-level water storage infrastructure (such as tanks, check dams, and local water recharge systems). And there are massive needs for investment in water supply systems for growing cities and for underserved rural populations (World Bank Report).

The problems of a developing India, however, are not limited to providing adequate quantities of water. Growing populations, cities, and industries are putting great stress on the aquatic environment. Many rivers—even very large ones—have turned into fetid sewers. India’s cities and industries need to use water more effectively, and there will have to be massive investments in sewers and wastewater treatment plants (World Bank Report).

Evidence abounds of the inability of the state water machinery to address even the problems of the provision of public irrigation and water supply services.  This decline in the quality of public irrigation and water supply services would normally be expected to produce social unrest and political pressure. But to the (temporary) rescue of Indian society came a simple and remarkable transformational technology—the tube-well. With large areas of India having substantial and easily-accessible aquifers, people were able to ignore the inconvenience of poorly functioning public systems and become self-reliant using groundwater. In many ways, this ‘era of the individual coping strategies’ has been remarkably successful. Irrigators have either drilled individual tube-wells or relied on others’ tube-wells (giving rise to elaborate informal water markets). This has happened on a massive scale, with 20 million tube-wells now installed, and groundwater now accounting for over 50 percent of irrigated area (World Bank Report).

In many ways, this private, self-provision strategy has been a success, and has underpinned spectacular gains in agricultural production and the rise of thousands of towns and cities. This has bred an attitude among many—political leaders, industrialists, irrigators, and common people—that ‘we have muddled through okay, and we will continue to muddle through’. This is a dangerous complacency, because it is based on three erroneous assumptions:

• that there is limitless groundwater;
• that the environmental debts (including vanishing wetlands and polluted rivers and aquifers) do not seriously constrain human activity; and
• that the financial liabilities inherent in these systems can continue growing indefinitely.

In already-large and rapidly-growing segments of the economy and in many of the most productive regions of the Indian economy, this self- provision model is no longer sustainable. The National Commission on Water of 1999 has shown that overall water balances are precarious, that crisis situations already exist in a number of basins, and that by 2050 demands will exceed all available sources of supply. Already about 15 percent of all aquifers are in critical condition, a number which will grow to 60 percent in the next 25 years unless there is change. About 15 percent of India’s food is being produced using non-renewable, ‘mined’, groundwater. Since aquifer depletion is concentrated in many of the most populated and economically productive areas, the potential social and economic consequences of ‘continued muddling through’ are huge (World Bank Report).

The end of the era of massive expansion in groundwater use is going to demand greater reliance on surface water supply systems. India's water situation is already critical, and it needs sustainable development and management of surface water and groundwater usage. This is going to require recuperation of the large stock of infrastructure and large-scale investment in public infrastructure of all scales (for transfer, storage and distribution of surface water supplies, but also for treatment of wastewater).

The average annual rainfall in India amounts to an annual precipitation of 4,000 BCM. Of this, the average annual flow in the river system of India has been estimated at 1,869 BCM. Groundwater recharge is estimated to be 22-23% (CWC 2010; CGWB 2011, Amarasinghe et al. 2008). However, all available natural freshwater, surface water or ground water resources are not accessible for use. More than 80 per cent of the annual runoff in rivers occurs during the monsoon months of June-September. Due to this runoff, most of the water not only flows unutilised to the sea, but also causes immense flood losses. To tackle the water crisis threatening the future, steps have to be taken to store the surplus water that flows during the monsoon season. In India, the availability of water is highly uneven, both in space and time. The prime source of water is precipitation which is confined to only about 3-4 months in the year and varies from 10cm in the western parts of Rajasthan to over 1000 cm to Cherapunji in Meghalaya. As a result, the country is afflicted by drought-flood-drought syndrome. Nearly a third of the country is drought prone while an eighth of the country is flood prone. Out of the total surface water available in our country, only seventh of the water available is now used. The rest is flowing waste causing, disastrous floods year after year. The Ganga-Brahmaputra-Meghna is a major basin which carries more than 1,000 million acre feet of water out of total 1440 million acre feet in India. Water is a scarce commodity and several basins such as Cauvery, Yamuna, Sutlej, Ravi and other smaller inter-State/intra-State rivers are short of water. 99 districts of the country are classified as drought prone and an area of about 40 million hectare is prone to recurring floods.
The inter-basin transfer of water will help to reduce the scale of this suffering and associated losses.

Approximately 74 Lakh Hectares of water bodies are available in the country. Water resources of various types:

Rivers & Canals (Length in km) 195095
Reservoirs (Lac hectares) 29.26
Tanks, Lakes & Ponds (Lac hectares) 24.33
Floodplain Lakes & Derelict Water (Lac Ha) 7.98
& Brackish Water (Lac hectares) 11.55
Total (Lac hectares)  73.33

India is blessed with many rivers. Twelve of them are classified as major rivers i.e. rivers with catchment area more than 20,000 sq.kms. each. These account for total catchment area of 252.8 million hectare (M.Ha). Of the major rivers, the Ganga - Brahmaputra Meghana system is the biggest with catchment area of about 110 M.Ha.

The average annual surface water flow available to the country is estimated at 1,869 billion cubic metre (BCM). However, because of topographical, hydrological, and other constraints, only about 690 BCM of the available surface water can be utilised. Along with the additional annual replenishment of ground water of 432 BCM (which gets charged on annual basis), the utilisable water resource in the country stands at 1,122 BCM. (Ground water resources: Annual Replenish-able Ground Water Resources 432.71 BCM, Natural Discharge 34.60 BCM, Annual Ground Water Draft 245.04 BCM (Irrigation 222.33, Domestic & Industrial 22.72)). Harnessing the 690 BCM of utilizable surface water is possible only if matching storages are built to the required extent. As of March, 2016, Live storage capacity of major and medium projects is 253 BCM.  Projects under construction are likely to add 51 BCM while 110 BCM can be contributed by the projects under consideration.

“National Perspective Plan for Recharge to Ground Water by Utilising Surplus Monsoon Runoff” has indicated that out of the monsoon runoff in the river basins, a part can be stored in the sub-surface vadose zone (i.e. the saturation zone of the river basins up to 3 m below ground level), the scope for which has been estimated at about 214 BCM.

India has a growing population which is expected to grow further at a decelerating pace and stabilize around 1.5 billion by 2050. This will increase demand for reliable sources of food and improved agriculture yields, both of which, require significantly improved irrigation network. Projected Water Demand in India (by 2050)(in BCM): Irrigation 1072, Drinking Water 102, Industry 63, Energy 130, Others 80, Total 1447 BCM.

Inter-basin transfer of water, if taken up to the full extent as proposed under the National Perspective Plan, would further increase the utilizable quantity by approximately 220 BCM, 34000 MW of power can be generated and perennial inland navigation could be provided. Also very large benefits of flood control would be achieved.

The National Perspective Plan for Inter-basin transfer of water comprised of two main components, Himalayan Rivers Development, and Peninsular Rivers Development.

Himalayan Rivers Development envisages construction of storage reservoirs on the main Ganga and the Brahmaputra and their principal tributaries in India and Nepal along with inter-linking canal system to transfer surplus flows of the eastern tributaries of the Ganga to the West apart from linking of the main Brahmaputra with the Ganga.  Apart from providing irrigation to an additional area of about 22 million hectares, the generation of about 30000 MW of hydro-power, it will provide substantial flood control in the Ganga-Brahmaputra basin.
Peninsular Component would send water from the eastern part of India to the south and west. The southern development project (Phase I) would consist of four main parts. First, the Mahanadi, Godavari, Krishna and Kaveri rivers would all be inter-linked by canals. Reservoirs and dams would be built along the course of these rivers. These would be used to transfer surplus water from the Mahanadi and Godavari rivers to the south of India. Under Phase II, some rivers that flow west to the north of Mumbai and the south of Tapi would be inter-linked. The water would supply additional drinking water needs of Mumbai and provide irrigation in the coastal areas of Maharashtra. In Phase 3, the Ken and Chambal rivers would be inter-linked to serve regional water needs of Madhya Pradesh and Uttar Pradesh. Over Phase 4, a number of west-flowing rivers in the Western Ghats, would be inter-linked for irrigation purposes to east flowing rivers such as Kaveri and Krishna. It will irrigate an additional 25 million hectares by surface waters, 10 million hectares by increased use of ground waters and generate hydro power, apart from benefits of improved flood control and regional navigation.

Ultimate Irrigation Potential

In the total 329 million ha (mha) of geographical area of the country, the total cropped area is about 198.4 mha, out of which net sown area is only about 140.1 mha. Only about 68.3 mha, i.e., 48.8 percent of the net sown area, is reported as irrigated. There is a need to bring more cropped area under assured irrigation to increase agriculture productivity and production. The ultimate irrigation potential of the country is estimated at about 140 mha, with about 76 mha from surface water sources and about 64 million ha from groundwater sources. High priority needs to be accorded to balance the use of irrigation potential. Annual Report 2018-19: The total area coverage under food-grains is estimated at 122.74 million hectares during 2018-19. Area coverage under Nutri / coarse cereals is estimated at 22 million hectares in 2018-19. Further, area coverage under pulses is estimated at 28.28 million hectares.

The production of food-grains during 2017-18 is estimated at 277.5 million tonnes. With inter-basin transfer of water, food-grain production is expected to touch 393.88 million tonnes mark with MSTG link.

Storage Requirements:

Live storage capacity of major and medium projects which was only 15.6 BCM at the time of independence, has gone up to 253 BCM.  Projects under construction are likely to add 51 BCM while 110 BCM can be contributed by the projects under consideration.

India currently stores only 6% of its annual rainfall or 253 BCM, while developed nations strategically store 250% of the annual rainfall in arid river basins. India also relies excessively on groundwater resources with 20 million tube wells installed. India has built nearly 5,000 major or medium dams, barrages, etc. to store the river waters and enhance ground water recharging.  The important dams have an aggregate gross storage capacity of 253 BCM. About 15 percent of India’s food is being produced using rapidly depleting / mining groundwater resources. The end of the era of massive expansion in groundwater use is going to demand greater reliance on surface water supply systems. Even after constructing 5000 major or medium dams, the per capita storage in the country is 213 m3 as against 6103 m3 in Russia, 4733 m3 in Australia, 1964 m3 in USA and 1111 m3 of China.

The total water requirement for various uses like agriculture, industrial and domestic uses etc. in the country has been assessed by the ‘Standing Sub-Committee for Assessment of Availability and Requirement of Water for Diverse Uses in the Country’ to be about 813 BCM, 1093 BCM, and 1447 BCM by the year 2010, 2025 and 2050 respectively.

Total water requirement of 1447 BCM for various needs by the year 2050 is significantly more than the current estimate of utilizable water resource potential (1122 BCM). Therefore, when compared with the availability of ~ 500 BCM at present, the water availability around 2050 needs to be almost trebled. Various options have to be considered in quantitative terms, as possible sources to augment the anticipated deficit. Rainwater harvesting and water-conservation measures must receive the highest priority followed by renovation and recycling to be followed by intra- and then inter-basin transfers.

The Central Water Commission worked out the estimated utilizable surface water (EUSW) in each river basin. This is the quantum utilizable through conventional run-of-the-river schemes and storage reservoirs and among other constraints depends on availability of suitable sites for construction of dams and diversion structures. Total utilizable surface flow in all river basins of the country was thus estimated ~ 690 BCM /yr. Further, a bare minimum live storage of 385 BCM was estimated as needed to balance seasonal flows to achieve ~ 690 BCM /yr EUSW for irrigation of 76 mha. Sedimentation in reservoirs reduces utilizable resource. Replenishable groundwater (RGW) resource was estimated by the working groups (constituted in 1994–95) based on a large volume of hydro-geological and related data generated by Central Ground Water Board (CGWB) and the State groundwater organizations and the existing knowledge of groundwater regime , as ~ 432 BCM . The estimated RGW is the sum of natural recharge from rainfall (342 BCM) and potential due to recharge augmentation from canal irrigation system (90 BCM ).

National water resources of India at a glance

Resource                                                                             Quantity
Annual precipitation (including snowfall)                                 4000 BCM
Evaporation + groundwater                                                   2131 BCM
Average annual potential flow in rivers                                   1869 BCM
Estimated utilizable water resources                                      1122 BCM
Surface water (EUSW)                                                           690 BCM
Replenishable groundwater (RGW)                                          432 BCM

In general, the following elements seem to form part of a viable long-term water-resource development strategy:

(i)          Achieve the full utilizable potential of ~ 1120 km3 /yr (SW = 690 km3 /yr; GW = 430 km3 /yr) to meet the anticipated demand (1182–1450 km3 /yr).
(ii)         Convert part of static groundwater potential to dynamic potential by over-exploiting aquifers and artificially recharging part of monsoon run-off in excess of utilizable surface potential to these aquifers.
(iii)        Increase irrigation leading to increase in dynamic storage of groundwater through exploitation/recharge of aquifers.
(iv)       Reuse and recycle industrial and municipal wastewater.
(v)        Transfer from basins with surplus water to basins with deficit potential.
(vi)       Import agricultural produce – virtual water.

To meet the growing requirements of water for various applications and to be counted as a developed nation, it is imperative not only to develop the new water sources but to conserve, recycle and reuse water wherever possible. It has been shown that conservation of water through rainwater harvesting and artificial groundwater recharge can generate about 125 BCM /yr of additional water. In addition to artificial groundwater recharge, additional water is also available due to return flow (RF) of irrigation water in the form of surface discharges and infiltration in the groundwater sources. Additional RF for 2050 has been estimated to be 133 BCM /yr, adding to existing 90 BCM/yr. Similarly, recycling of municipal and industrial wastewater can regenerate another ~ 177 BCM /yr water. Both these measures provide water at local scale, where people live and engage in productive activities. However, it is only the former, namely rainwater harvesting and artificial groundwater recharge, where people and communities can directly participate due to the low level of technologies involved. The gestation period for such projects can be a few months to a few years and because of the distributed nature of this activity, it is only through the involvement of people and communities that sustainable works can be carried out. Whereas in the latter case, namely recycling and reuse of wastewater, local governments such as municipalities and industries are required to carry out the development work. The gestation period for such activities can be a couple of years as the required technology becomes more advanced and the capital, intensive. At the next level, there is still untapped potential of almost 550 BCM /yr comprising groundwater and conventional run-of-the-river schemes. Further, inter-basin transfer of water as proposed by NWDA15 can generate another ~ 174 BCM /yr of water. Adding all these together with the existing water availability of 500 BCM, water source available for 2050 would be 1660 BCM.

This provides long-term water-security and could be utilized to create food and nutrition security to the vast population. And job guarantee program could play a vital role in this.

Full Employment & Price Stability, as detailed above, could be achieved by the Government, if policymakers apply their understanding of the monetary operation under the current fiat money regime. Understanding how monopoly money works would advance public policy formation a great deal.