The macro-management of capitalist economies based on this premise became increasingly limited not only because of the inflationary barrier which constrained the use of Keynesian-style policies. With the rise of finance in developed capitalist economies, government deficits were seen as inherently negative, either because they were seen as inflationary or because they were seen inevitably to "crowd out" private investment by drawing upon the available pool of savings, raising interest rates, etc.
 
Of course, this supposition too is flawed, implicitly dependent upon the assumption of full employment of resources which is hardly ever justifiable. Nevertheless it has achieved the status of dogma in much mainstream thinking. As a result, the need to restrain the fiscal deficit is seen as axiomatic not only by the IMF but also by governments anxious to attract private capital, and financiers generally.
 
But there are at least two very common situations in which fiscal deficits are not only justifiable but may even be necessary for a desired level of economic activity or a desired pattern of economic growth. The first is when there is unemployment/excess capacity in the economy, or it is undergoing a recession, in which a stimulus is required for economic activity in the manner described above.
 
The second relates to the pattern of the expenditure which constitutes the fiscal deficit. If this is in the area of productive capital expenditure which is necessary for future growth, then clearly any investment which contributes to increased output in future has a positive role. The basic rule of thumb here is that the expected social returns from such investment (not necessarily just the financial returns) should be higher than the prevailing rate of interest.
 
These are such basic and obvious ideas that it is difficult to realise how seldom they are expressed, even in the current Indian conjuncture where both such conditions hold. Thus, despite the presence of substantial unutilised capacity, large stocks of foodgrain currently in the public domain, and falling rates of crucial public investment in infrastructure and other important areas, the most common argument is that the government "does not have the money" to undertake the necessary expenditures. It is even more common to come across the perception that the most important problem in the economy today is the need to contain the fiscal deficit, even at the cost of lower growth and reduced public investment.
 
The consequence of such a view is twofold. First, it restricts the ability of the government to ensure a higher level of economic activity than we are currently witnessing, and to ensure a more definitive recovery from the recession. Second, and perhaps more important, it means that the government does not undertake important expenditures which impact directly on the welfare of most of the people because of the bogey of the large fiscal deficit.
 
The major negative effects of this are felt not only in physical infrastructure such as energy and transport, where private sector activity is simply inadequate for social requirement, but also in health and education which depend critically upon public expenditure. Similarly it prevents the expansion of rural public works programmes and other rural development schemes which could both raise employment generation and improve the availability of rural infrastructure. The important point here is that the obsession with containing the fiscal deficit primarily caters to finance - both domestic and international - which objects to such deficits and more generally to government expenditure. In doing so, it neglects the material interests of the large bulk of people in the country, who are adversely affected by the cuts in expenditure which are self-imposed by the government. The distributional effects of this process cannot be ignored for too long.