OLD-SCHOOL MAGIC

Key­ne­sian eco­nom­ics is still rel­e­vant to In­dia. THE GOVERN­MENT MUST IN­VEST TO EN­SURE ECO­NOMIC GROWTH

Millennium Post - - FRONT PAGE - NANTOO BAN­ER­JEE

An un­nec­es­sary con­tro­versy is be­ing cre­ated about In­dia’s ‘un­ten­able’ fis­cal deficit for the fi­nan­cial year 2017-18 as it reached 96.1 per cent of the bud­get es­ti­mate to­wards Oc­to­ber end, lifted by an in­crease in ex­pen­di­ture. Sim­i­larly, the grow­ing crit­i­cism by cer­tain in­ter­est groups about large non-per­form­ing as­sets (NPAS) with the ma­jor­ity of state-con­trolled banks would ap­pear to be un­war­ranted, if not un­called for, given the de­vel­op­ing sta­tus of In­dia’s econ­omy and the im­por­tance of most of the de­fault­ers’ stalled projects. First, there is noth­ing wrong in the govern­ment’s large bud­get deficits, if it is meant for sup­port­ing ba­sic in­dus­trial projects, hous­ing and in­fra­struc­ture, cre­at­ing a large num­ber of jobs, rais­ing in­come and de­mands. That will also induce profit-ori­ented pri­vate sec­tor firms to in­vest, progress and, in the process, fur­ther grow the econ­omy. It is time that In­dia, once again, starts flirt­ing with the widely re­pu­di­ated the­ory of Key­ne­sian eco­nom­ics. De­vel­op­ing China’s emer­gence as the world’s sec­ond-largest econ­omy owes a lot to both large deficit fi­nanc­ing by the state be­tween the mid-1970s and 1990s and, once again, in 2008 and 2009, to ex­pand in­fra­struc­ture, core in­dus­tries and de­fense man­u­fac­tur­ing. China also con­trolled the ex­change rate of Yuan to sub­sidise ex­port pro­duc­tion to earn pre­cious for­eign ex­change and en­hance lo­cal em­ploy­ment. China’s com­mer­cial banks mostly main­tained a very high level of NPAS — much higher than what In­dia wit­nessed in the re­cent years. China’s pol­i­cy­mak­ers were not con­cerned.

China’s post-mao com­mu­nist lead­er­ship had se­lec­tively used the Key­ne­sian eco­nomic the­ory to its great ad­van­tage, although it took over 20 years for John May­nard Keynes’s “Gen­eral The­ory” to be trans­lated into Chi­nese. It was first pub­lished in China in 1957, around the time of Mao Tse Tung’s “anti-right­ist” cam­paign. Mao started his fa­mous agrar­ian revo­lu­tion to unite mil­lions of farmhands to pro­mote com­mu­nism in China. Unit­ing in­dus­trial work­ers and state pro­mo­tion of large in­dus­tries came later. In 1950, China, now the world’s largest steel­maker, pro­duced even less steel than In­dia. Post-mao, Chi­nese lead­ers se­lec­tively fol­lowed Key­ne­sian eco­nom­ics for rapid in­dus­trial growth. Hu Jin­tao and Wen Ji­abao em­braced Key­ne­sian eco­nomic pre­scrip­tions with great de­ter­mi­na­tion. In 2008, they han­dled the coun­try’s fi­nan­cial cri­sis by ap­prov­ing a large stim­u­lus pack­age and spurred the coun­try’s banks to lend.

In Ja­pan, most large com­mer­cial banks too main­tained high rates of NPAS dur­ing its fastest growth years be­tween the 1970s and 1990s. How many In­di­ans today re­mem­ber Ja­pan’s Dai-ichi Kangyo, the world’s largest bank dur­ing the lat­ter part of the 20th cen­tury? It was cre­ated in 1971 by a con­sor­tium of Dai-ichi, Ja­pan’s old­est bank, and Nip­pon Kangyo Bank, a state fi­nan­cial in­sti­tu­tion that granted long-term loans to in­dus­try and agri­cul­ture. The bank served its pur­pose for sev­eral years be­fore it sulked un­der high NPAS. It had to be merged with Fuji Bank and the In­dus­trial Bank of Ja­pan to form the Mizuho Fi­nan­cial Group in 2000, with­out cre­at­ing any panic among its de­pos­i­tors and cred­i­tors. It was re­struc­tured again, the very next year.

In­dia’s ini­tial ‘so­cial­is­tic pat­tern’ of econ­omy built in the 1960s and1970s were sub­stan­tially de­signed on Key­ne­sian pre­scrip­tions of deficit fi­nanc­ing and job cre­ation. The govern­ment cre­ated a large pub­lic sec­tor to pro­vide a big in­dus­trial boost for growth of the pri­vate and co-oper­a­tive sec­tors since the1980s. In­dia’s pri­vate sec­tor busi­ness did not have enough money to in­vest big in the core and in­fra­struc­ture sec­tors. Fam­ily-run com­mer­cial banks were na­tion­alised to sup­port the govern­ment and pri­vate in­vest­ments, ex­pand branch net­work and cre­ate jobs for growth.

How­ever, the govern­ment fo­cus rad­i­cally changed since 1991, af­ter a for­eign debt cri­sis and half-hearted World BANKIMF guided eco­nomic re­form that slowly con­ceded the in­dus­trial turf to for­eign di­rect in­vest­ment, ac­cord­ing to the over­seas in­vestors’ choice. Keynes was quickly for­got­ten. The fo­cus shifted to deficit con­trol, mar­ket forces, large trade im­bal­ance, for­eign bor­row­ing and the float­ing Ru­pee. For long, In­dia’s pri­vate sec­tor en­trepreneurs have been draw­ing ex­cess funds from the na­tion­alised banks for their projects by in­flat­ing the project costs and col­lud­ing with banks. Ex­cess funds were mostly di­verted by those en­trepreneurs to float an­other com­pany or sup­port other projects. In­flated project cost led to high pro­duc­tion cost. Some turned NRIS to run away from the coun­try with such funds, run­ning their In­dia busi­ness com­fort­ably from out­side. It would be wrong to as­sume that a de­vel­op­ing econ­omy such as In­dia, should at this point of time, strictly fol­low the pat­terns of highly de­vel­oped economies in Europe and North Amer­ica on deficit man­age­ment prac- tices and com­mer­cial bank as­set qual­ity norms.

In­dia’s ane­mic pri­vate sec­tor and signs of fa­tigue in the prop­erty mar­ket point to the in­creas­ing needs of the govern­ment to pro­vide ad­di­tional stim­u­lus to swell the eco­nomic growth tar­get to 7.8 per cent in 2018-19 and 8.5 to 9 per cent in the next two years. In­vest­ments in road­ways, rail­ways, in­land wa­ter­ways, mass hous­ing, ru­ral dig­i­tal con­nec­tiv­ity and de­fence man­u­fac­tur­ing should drive this growth. The govern­ment should not worry about bud­get deficits for such a pur­pose. Banks must play their part to boost over­all do­mes­tic spend­ing through credit ex­pan­sion, the hall­mark of Key­ne­sian poli­cies. Mas­sive job cuts in the pri­vate sec­tor will have to be more than matched by cre­ation of new jobs through pub­lic spend­ing in new projects. If nec­es­sary, the Ru­pee may have to be de­val­ued to en­cour­age ex­ports and com­press im­ports. The pol­icy will strongly sup­port the govern­ment’s ‘Makein-in­dia’ pro­gramme. In 1935, John May­nard Keynes wrote to Ge­orge Bernard Shaw: “I be­lieve my­self to be writ­ing a book on eco­nomic the­ory which will largely rev­o­lu­tionise – not, I sup­pose, at once but in the course of the next ten years – the way the world thinks about its eco­nomic prob­lems.” And, true to his words, Keynes’ mag­num opus — The Gen­eral The­ory of Em­ploy­ment, In­ter­est and Money — pub­lished in Fe­bru­ary 1936, trans­formed eco­nom­ics and eco­nomic pol­i­cy­mak­ing around the world. Eighty-two years on, the Key­ne­sian the­ory still holds up in de­vel­op­ing economies, in­clud­ing In­dia.

(The views ex­pressed are strictly per­sonal.)

Banks must play their part to boost over­all do­mes­tic spend­ing through credit ex­pan­sion, the hall­mark of Key­ne­sian the­ory. Mas­sive job cuts in the pri­vate sec­tor will have to be more than matched by cre­ation of new jobs through pub­lic spend­ing in new projects

82 years later, Keynes’ the­ory of debt fi­nanc­ing con­tin­ues to be rel­e­vant for de­vel­op­ing economies

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