Budget 2020: Turn to John Maynard Keynes to revive Indian economy

Steadily increasing joblessness rate

Now that the medical diagnosis of the state of India’s economy fits Prof Mankiw’s observations, it would not be farfetched to imagine a very unhappy ending unless timely corrective actions are not taken.

What Keynes would have prescribed?

The Keynesian prescriptions are popular, more so after the 2007-08 financial crisis: budget deficit (government spending more than its profits) to offset declining investment and raise aggregate need. It concentrates on demand-side steps for increasing the economy in the brief run.

That budget deficit in a demand depression situation (a) would not result in inflation – due to the fact that of high joblessness and low industrial production – as is the case in India or (b) crowd out personal financial investment – which is depressed in spite of lowering of rates of interest and business tax cut – are something economic experts do not disagree with and hence, requires no elaboration.

When it comes to the rising financial deficit, Nobel laureate Abhijit Banerjee keeps duplicating that fiscal tightening up is not what India requires in the present circumstance. Another Nobel laureate Paul Krugman too supported the concept of financial growth in the context of the 2007-08 monetary crisis – when lower rate of interest stopped working to enhance financial investment (though he points out when even no interest rate fails to improve investment) – instead of fiscal austerity which “makes a bad situation worse”.

Not just that, even the champs of neo-liberal policies such as the International Monetary Fund (IMF) and the World Bank have actually changed their stand on fiscal austerity post-Structural Adjustment Programme (SAP) – proposed and pursued strongly for several years by them and the 2007-8 international financial crisis.

Read: Budget 2020: Taxation of dividends – the next reform?

In a 2016 research study provocatively entitled Neo-liberalism: Oversold? 3 leading IMF financial experts batted for fiscal expansion, especially for economies with a strong performance history of being fiscally responsible, saying: “Austerity policies not just generate substantial welfare expenses due to supply-side channels (bottlenecks), they likewise hurt demand – and hence worsen employment and joblessness.”

They also refuted the notion that financial combination can be expansionary (that is, raise output and work), by observing: “However, in practice, episodes of financial consolidation have actually been followed, typically, by drops rather than by growth in output. Typically, a debt consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 portion point and raises by 1.5 percent within five years the Gini measure of income inequality.”

Federal government of India’s medical diagnosis: Downturn cyclical, not structural

The existing slowdown is dealt with as a cyclical one, rather than a structural one, by the Government of India. The last such assertion was made by none besides the Chief Economic Advisor (CEA) Krishnamurthy Subramanian who stated, on December 9, 2019: “The existing downturn is a lot more on the cyclical side.”

This “cyclical” technique does not in any way revoke the Keynesian prescriptions. Budget deficit can likewise be a countercyclical fiscal policy step to resolve depressed financial activity and unemployment.

Investment-led method: A supply-side option to a demand-side problem

Ever since the new Economic Survey of 2018-19 was unveiled in July 2019, promoting an “investment-led development model”, the Central government’s reaction to the deepening recession has mostly been to improve investment, specifically the personal sector investment – cut in business tax, bank mergers, recapitalisation of banks, cut in GST rates, cut in benchmark repo rate and higher devaluation on vehicles and so on

. This is a supply-side solution – increasing private financial investment to drive development – to what is plainly a demand-side problem (demand depression). The other problem with this technique is that it takes a longer time to bear fruit, while the Keynesian approach (demand-side policy) improves the economy in the short run.

Now the newest information from the National Statistical Office (NSO) – the very first advance estimate of national income, launched on January 7, 2020 – jobs the PFCE growth to hit a low of 5.8% in FY20 from 8.1% in FY19.

The graph listed below programs quarterly development in PFCE.

Development slowing down considering that Q2 of FY19; an uptick in Q2 of FY20

When the total demand for items and services decreases, businesses throughout the economy see their sales fall off. Rising unemployment and declining revenues even more depress demand, leading to a feedback loop with a really dissatisfied ending. The Mumbai-based business info business Centre for Monitoring Indian Economy’s(CMIE)monthly survey of work (with a sample size of over 1.5 lakh families, which is larger than that of the NSO’s) shows that the unemployment is increasing gradually – from 5.49% in Q1 of FY19 to 7.64% in Q3 of FY20. This report also showed that the Labour Force Participation Rate (LFPR) fell from 55.9% in 2011-12 to 49.8% in 2017-18. (government costs more than its income) to make up for decreasing investment and raise aggregate demand.

(c.)Nobody doubts corporate profits are declining The RBI in its assessment of private corporate companies for Q2 of FY20 discovered that development in net profits of business entities had actually fallen to -54.3 % from +41.7 % in Q2 of FY19 because industrial need had actually compromised which this weakening in need was “broad-based across industries“. This was based on a survey of 2,696 business.