To re­vive the econ­omy, Modi must turn to max­i­mum gov­ern­ment

Re­vival is con­tin­gent on de­mand. De­mand is con­tin­gent on in­vest­ment. And in­vest­ment needs State spend­ing

Hindustan Times (Jalandhar) - - COMMENT - PULAPRE BALAKRISHN­AN Pulapre Balakrishn­an is pro­fes­sor of Ashoka Univer­sity, Soni­pat The views ex­pressed are per­sonal

Ad­dress­ing the an­nual ses­sion of the Con­fed­er­a­tion of In­dian In­dus­tries (CII) on June 2 via video con­fer­enc­ing, Prime Min­is­ter (PM) Naren­dra Modi spoke of get­ting growth back. He em­phat­i­cally stated that “We will get our growth back” once Un­lock 1.0 com­menced and greater re­lax­ations kicked in. It seems he had in mind a V-shaped, ie, a quick re­cov­ery. He ex­plained that his con­fi­dence was based on his trust in the ca­pa­bil­i­ties and in­tel­lect of In­dia, and the fact that the re­forms un­der­taken re­cently by his gov­ern­ment were sys­temic.

At a time of na­tional de­jec­tion, if not de­spair, the words of a leader have a role in in­still­ing self-be­lief in the pop­u­la­tion. But un­less they are ac­com­pa­nied by con­crete ac­tion, they will not amount to much. The sparkling speeches of Win­ston Churchill may have en­cour­aged his peo­ple when Bri­tain was at­tacked dur­ing World War II. But they were un­likely to have suf­ficed had the United States not in­ter­vened. Pre­sum­ably, the anal­ogy will not be lost on the PM as he uses the metaphor of war when char­ac­ter­is­ing the nec­es­sary re­sponse to Covid-19. In this con­text, it is his gov­ern­ment that would be ex­pected to act, not the in­dus­tri­al­ists whom he had ex­horted to do so in his ad­dress. One can go fur­ther and state that, right now, the pri­vate sec­tor can­not do much on its own to get growth back.

To ap­pre­ci­ate why the gov­ern­ment is cen­tral, it needs to be un­der­stood that in an econ­omy with ex­cess ca­pac­ity, in­come is de­ter­mined by the ex­pen­di­ture on goods or “ag­gre­gate de­mand”. When an econ­omy has been shocked into a lower level of ac­tiv­ity, it could well re­main there, un­less ag­gre­gate de­mand re­vives. For ag­gre­gate de­mand to re­vive, there has to be in­vest­ment.

To un­der­stand this, think of de­mand as hav­ing two parts, namely con­sump­tion and in­vest­ment. Con­sump­tion is largely de­ter­mined by in­come, and can­not rise un­less the lat­ter does so first. Right now, in In­dia, in­come is de­pressed due to the eco­nomic shock. On the other hand, in­vest­ment is not con­strained by in­come and can be fu­elled by credit. With greater in­vest­ment, ag­gre­gate de­mand rises, and as a con­se­quence so does pro­duc­tion or in­come. But pri­vate in­vest­ment, though based on ex­pec­ta­tion of the fu­ture, is at least partly driven by its cur­rent state. So, with out­put de­pressed by a 68-day­long lock­down, pri­vate in­vest­ment, and thus growth, could be held back even af­ter the lock­down is lifted. The PM is op­ti­mistic when he ex­presses con­fi­dence that we will get our growth back. For­tu­nately, eco­nomic rea­son­ing shows a way out of the present sit­u­a­tion. This is that the gov­ern­ment should raise ag­gre­gate de­mand, prefer­ably through in­vest­ment, to take the econ­omy back to where it was in late March.

Again, in his ad­dress to the mem­bers of CII, the PM spoke of the growth po­ten­tial of the re­forms im­ple­mented by his gov­ern­ment, es­pe­cially in agri­cul­ture. Th­ese are needed and sig­nif­i­cant but they are aimed at the sup­ply side of the econ­omy while the prob­lem to­day is a de­mand short­fall. We see this all around us in the econ­omy — when shop­keep­ers in Mum­bai speak of how their daily sales are, on av­er­age, a quar­ter of what they were be­fore the lock­down, and when mi­grant work­ers, hav­ing reached their homes in Odisha by sea, speak of re­turn­ing to Chen­nai in search of work. So, a short­age of de­mand for goods and labour is what is at stake, and a stim­u­lus alone can ad­dress it.

The eco­nomic pack­age an­nounced by the fi­nance min­is­ter in mid-May was not a stim­u­lus, as it does not in­ject de­mand into the econ­omy. Greater pub­lic spend­ing alone can do that at the present junc­ture. But, for some rea­son the gov­ern­ment has shied away from un­der­tak­ing it.

Fi­nally, the PM stressed that get­ting growth back is not so dif­fi­cult as now In­dian in­dus­try has a clearly de­fined goal in Aat­manirb­har Bharat. This is in­trigu­ing. Of what help can a dec­la­ra­tion of in­de­pen­dence can be to In­dian in­dus­try is not clear. The point is that self-re­liance is of­ten nei­ther pos­si­ble nor de­sir­able to a firm. In a mod­ern econ­omy, one firm is de­pen­dent on oth­ers for its in­puts. Some of th­ese are un­avail­able on the mar­ket. Th­ese are the pro­ducer ser­vices vi­tal for ef­fi­cient pro­duc­tion. We may term th­ese col­lec­tively as in­fra­struc­ture. Phys­i­cal in­fra­struc­ture en­com­passes elec­tric­ity, wa­ter sup­ply, roads, and in­dus­trial waste man­age­ment among other in­puts. The huge ini­tial in­vest­ment nec­es­sary to sup­ply th­ese pro­ducer ser­vices and the fact that some of them are pub­lic goods, and there­fore, un­likely to be pro­vided by the pri­vate sec­tor, leaves it to the gov­ern­ment to pro­vide them if we are to have an econ­omy that gen­er­ates wealth and cre­ates jobs while do­ing so. For In­dia’s pro­duc­ers, At­manirb­har Bharat will re­main just an­other slo­gan as long as a sup­port­ive eco-sys­tem does not ex­ist.

A re­cov­ery post-lock­down would re­quire the gov­ern­ment to pull out all stops. For this, the PM would have re­think his max­ims. There are times when “max­i­mum gov­er­nance” means max­i­mum gov­ern­ment. It is not too late to stim­u­late In­dia’s econ­omy.

THE ECO­NOMIC PACK­AGE

AN­NOUNCED BY THE FI­NANCE MIN­IS­TER IN MID-MAY WAS NOT A STIM­U­LUS, AS IT DOES NOT IN­JECT DE­MAND INTO THE ECON­OMY. GREATER PUB­LIC SPEND­ING ALONE CAN DO THAT

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