To revive the economy, Modi must turn to the highest government | Opinion – analysis
Addressing the annual session of the Confederation of Indian Industries (IIC) on June 2 via video conference, Prime Minister (PM) Narendra Modi spoke of regaining growth. He emphatically stated that “we will regain our growth” once Unlock 1.0 begins and further relaxation begins. It seems like he had a V-shape in mind, that is, a quick recovery. He explained that his confidence was based on his confidence in the capacities and intellect of India, and in the fact that the reforms recently undertaken by his government were systemic.
In a moment of national despondency, if not despair, the words of a leader have a role in instilling self-confidence in the population. But unless they are accompanied by concrete action, they will not amount to much. Winston Churchill’s brilliant speeches may have encouraged his people when Britain was attacked during World War II. But it was unlikely that they would have been enough if the United States had not intervened. Presumably, the analogy will not be lost on the Prime Minister, as he uses the war metaphor to characterize the necessary response to Covid-19. In this context, his government is expected to act, not the industrialists whom he urged to do so in his speech. One can go further and claim that, at the moment, the private sector cannot do much on its own to regain growth.
To appreciate why government is central, it must be understood that in an economy with excess capacity, income is determined by spending on goods or “aggregate demand.” When an economy is affected by a lower level of activity, it may well remain there, unless aggregate demand revives. For aggregate demand to revive, there has to be investment.
To understand this, think that demand has two parts, namely, consumption and investment. Consumption is largely determined by income, and cannot increase unless the latter does so first. Right now, in India, earnings are depressed due to the economic shock. On the other hand, investment is not limited by income and can be fueled by credit. With more investment, aggregate demand increases, and as a consequence so does production or income. But private investment, although based on expectations for the future, is driven at least in part by its current state. Thus, with production depressed by a 68-day lock, private investment, and thus growth, could lag even after the lock is lifted. The Prime Minister is optimistic when he expresses confidence that we will regain our growth. Fortunately, economic reasoning shows a way out of the current situation. This is that the government should increase aggregate demand, preferably through investment, to get the economy back to where it was in late March.
Again, in his speech to IIC members, the Prime Minister spoke of the growth potential of reforms implemented by his government, especially in agriculture. These are necessary and significant, but they are directed at the supply side of the economy, while the current problem is a deficit in demand. We see this all around us in the economy: when merchants in Mumbai talk about how their daily sales are, on average, a quarter of what they were before closing, and when migrant workers, who came to their homes in Odisha by Sea, they talk about going back to Chennai in search of work. So what is at stake is a shortage of demand for goods and labor, and only a stimulus can address it.
The economic package announced by the finance minister in mid-May was not a stimulus, since it does not inject demand into the economy. Higher public spending can only do that at the current juncture. But, for some reason, the government has avoided undertaking it.
Finally, the Prime Minister emphasized that recovering growth is not that difficult since the Indian industry now has a clearly defined objective in Aatmanirbhar Bharat. This is intriguing. What help a declaration of independence can be for Indian industry is unclear. The point is that self-sufficiency is often neither possible nor desirable for a company. In a modern economy, one company depends on others for its contributions. Some of these are not available in the market. These are vital producer services for efficient production. We can collectively call them infrastructure. The physical infrastructure encompasses electricity, water supply, roads, and industrial waste management, among other inputs. The huge initial investment required to supply these services to producers and the fact that some of them are public goods, and therefore unlikely to be provided by the private sector, let the government provide them if we want to have a economy that generates wealth and creates jobs while doing so. For Indian growers, Atmanirbhar Bharat will remain just another catchphrase as long as there is no supporting ecosystem.
A post-closing recovery would require the government to withdraw all stops. For this, the Prime Minister would have rethought his maxims. There are times when “maximum governance” means maximum government. It is not too late to stimulate the Indian economy.
Pulapre Balakrishnan is a professor at Ashoka University, Sonipat
The opinions expressed are personal.