A Govt Unequal to the Task as Economy Sinks

A striking aspect of the 24% decline in India’s GDP in the first quarter of 2020-21 compared with the first quarter of the last fiscal year is the decline by 10.3% in public administration, defence and other public services. This is a sector where the GDP (gross domestic product) is estimated not by the “output” of the sector but by the government expenditure incurred under these heads. The decline in the GDP originating in this sector, therefore, means a decline in public expenditure.

This is surprising for two reasons: first, it shows that government expenditure, instead of being “counter-contractionary” has been “pro-contractionary”. Second, during the lockdown imposed due to the pandemic, one would expect government spending on healthcare to go up, and thereby, raise the overall state expenditure instead of the fall we actually observe. 

When there is a lockdown and output contracts, it is incumbent on the government to increase its expenditure. The rise in expenditure reduces the degree of contraction; it puts purchasing power in the hands of people, so that many of them can maintain their consumption without getting into debt.

Even if the government is timid enough not to increase its expenditure, at least it must maintain its expenditure to limit the contraction in GDP. But the fall in government expenditure during the period of lockdown, which accentuates the overall contraction, is just the opposite of what the government should have done.

It’s true that in such a period, there is a fall in government revenues. But to reduce government spending because of this, so that the fiscal deficit does not increase, is the height of folly. It worsens the contraction of the economy and greatly increases the sufferings of the people.This, however, is exactly what the Narendra Modi government has done.

Moreover, the Modi government is persisting with this folly. Some may find this accusation strange since on the very first day of Parliament, the government has come up with a supplementary demand of Rs 2.35 lakh crore, which, it may be thought, represents substantial additional expenditure.

But, this impression is wrong. These supplementary demands are meant to cover the expenditure which the government had already announced earlier to cope with the pandemic, and which was over and above the budgetary provisions. This already announced expenditure, we know, was quite trivial, amounting altogether to no more than about 1% of GDP. True, these supplementary demands will revive MGNREGA (the rural job guarantee scheme), which had come to a virtual standstill because of lack of funds. However, such revival will only entail what has already been promised, not any further expansion.

This 1% of GDP being earmarked for relief during the pandemic is about the lowest among all the major economies of the world. In the United States, even Donald Trump had announced a relief package amounting to 10% of the country’s GDP; in Germany, it was 5%, and even more in Japan. The Modi government’s niggardliness is astounding, and that too at a time when hunger-related deaths are being reported from various parts of the country despite ample food stocks.

This niggardliness goes against the almost universal agreement among economists in the country, cutting across ideological lines, on the need for larger government spending. In fact, there has rarely been as much agreement among economists as on this issue. True, there was equally broad agreement among them against demonetisation, but that was a specific measure, no doubt of amazing thoughtlessness; it did not represent a policy direction.

The ideological differences among economists on the current issue relate to two points: first, what should be the areas where additional expenditure should be undertaken; second, how this additional government expenditure should be financed. 

On the first of these, while the Left position would be that such expenditure must entail a universal cash transfer to every non-income-tax-paying household, apart from covering investment on infrastructure, including social infrastructure like healthcare, orthodox economists would only emphasise investment on physical infrastructure.

With regard to the second point, immediately and evidently the additional expenditure has to be financed by a fiscal deficit, in which borrowings from the Reserve Bank of India will have to be the main source.

Indeed, many economists believe that the Central government can and should spend an additional Rs 10 lakh crore over and above what was budgeted earlier this year, and finance it immediately by enlarging the fiscal deficit to about 9% of GDP compared with the 3.5% that was targeted in the budget.

But, as the economy recovers, measures of additional resource mobilisation will have to be undertaken to bring down the fiscal deficit. Here, the Left position emphasises wealth taxation, which is virtually non-existent in India, as the means of doing so, while orthodox economists speak of the need to sell public sector assets, including land that is in the possession of public enterprises.

The difference between these two positions is quite basic and needs to be understood clearly. A fiscal deficit entails borrowing by the government, which puts claims upon the government in the hands of the private sector (we are assuming that foreign borrowings do not increase), and since these claims accrue to that segment of society that undertakes savings, a fiscal deficit increases the magnitude of wealth in the hands of the rich.

If the fiscal deficit is eliminated by additional resources mobilised through the imposition of a wealth tax, then private wealth remains where it was before the deficit-financed spending occurred. Wealth taxation, in short, does not bring down existing wealth inequalities; it only prevents a further accentuation of such inequalities through a larger fiscal deficit. The Left proposal, therefore, amounts to increasing government expenditure without increasing wealth inequalities.

By contrast, the orthodox proposal, such as the one put forward by Raghuram Rajan, former Governor of Reserve Bank of India, does not eliminate the increase in wealth inequalities caused by a larger fiscal deficit. It only substitutes in the hands of the rich physical assets (land) or ownership (equity) of public sector banks or of public sector enterprises, for claims upon the government. It changes the composition of the wealth in the hands of the rich, but does not negate its enhanced magnitude.

Notwithstanding these basic differences, there would be broad agreement among economists of different hues on the need for larger government expenditure to prevent the economy from getting into a deep and prolonged recession.

But, the government remains unmoved for reasons that are not obvious. Rajan appealed to bureaucrats in the government to wake up to the seriousness of the situation. But bureaucrats hardly determine policy within the Modi regime; it is the Prime Minister and his coterie that determine every policy, including economic policy.

If the government’s utter indifference to the disaster that awaits the economy is to be explained, if its unconcern about the massive unemployment that faces the people (which some have estimated to entail the loss of an additional 50 million jobs) is to be understood, then it is to the Modi mindset that we must turn. And here we find a combination of supreme naiveté with supreme confidence.

The naiveté consists of imbibing some absurd propositions from a particularly outdated version of bourgeois economics. The PM repeatedly calling big capitalists the “wealth creators” is an example of this. He has been told, and he believes, that these “wealth creators” will sooner or later undertake adequate investment to get the economy out of the problem it is facing.

On this thinking, there are no crises except occasional blips; the “wealth creators” are always there to usher in a new boom if for some reason the economy loses steam. The fact that the Great Depression of the inter-war years lasted almost a decade and might have continued but for the intervention of the Second World War, does not figure in this thinking, which misses completely the dependence of investment on the state of demand.

The confidence comprises the belief that no matter how impoverished the people are, no matter how extreme the hardships they face, their electoral support can always be won by promoting Hindutva and effecting a communal polarisation. It is an utterly cynical view, but then, the present dispensation represents the acme of cynicism.