An investment stimulus,not a trimmer budget,is the need of the hour.
There are two things that we hear all the time on television that the next quarter will be better and the next year even more so. Mint Road seemed hesitant earlier,but not any more. The earlier refrain was that FDI in retail would flow in. Why companies up to their ears in losses and scams would sink billions of dollars in India during a recession was no ones concern. Some scraps may get invested in India,but that will hardly matter.
The Chinese government carried out such a stimulus programme in August,and the Bretton Woods institutions pilloried them for it. But they politely stood their ground,and they are now growing at 7 per cent. But we are told that they will suffer,that the Chinese are making a mistake and their deficits will zoom upward.
But one can design a resource-raising programme along with a stimulus. For instance,we could cash in on the fact that this year has been good for agriculture and invest in markets and bazaars,processing infrastructure and roads in small towns. But thats old hat socialist economics. What we will do,as the finance ministry tells us,is cut employment programmes,along with rural infrastructure and agricultural investment. Fortunately,the RBI governor has decided to bet on growth and resisted the temptation to raise interest rates,at the cost of the disapproval of the Prime Ministers Economic Advisory Council chief. The PMs men keep talking of controlling inflation,even if it means throttling the economy.
If higher interest rates could control inflation,the RBI would have raised them. But it knows that,at the moment,inflation is being driven by the rise in food prices. Raising interest rates has nothing to do with it. In fact,it is clear that fiscal policy has to fall in line with the RBIs monetary stance.
The finance minister persists in cutting the plan,and all that the Planning Commission tells us is that the next quarter will be better. They must be joking. The fact is that spending is being cut during an investment recession. Their argument is that government spending only raises prices and not output. But my contention is that resources can be raised and then spent. This way,there will be no net fiscal effect,but the capital and intermediate goods sectors will revive. Also,if the government invests in rural infrastructure,food inflation may dim a bit.
We must,using PPPs,develop market towns,roads,communication links,skills,health facilities,financial products and a lot else,helping farmers sell their produce in markets. Or will we leave our farmers to the mercy of the free market,and then dutifully complain about food inflation and criticise the RBI for believing that interest rates dont really determine food prices?
Meanwhile,according to a Xinhua release from December 14,China will map out city clusters across the countrys central,western and northeastern regions and develop them into engines of growth. A well-known Chinese policy paper has used The Sardar Patel Institutes work on spatial input output clusters to model urban policies. Ye Ying and Fan Bingquans System Dynamics of Regional Social Economies explicitly draws on the Alagh,Subrahmanian and Kashyap (1971) model for developing a framework for the Baoshan area in Shanghai. One is happy ones thoughts matter somewhere. Our policymakers in the Planning Commission and finance ministry,as a matter of principle,stay away from Indian studies. So,when the economic survey models the demographic dividend,it uses World Bank papers rather than the ones that the IMF invited Indians to present. And when they use factor productivity estimates for India,they never rely on the Indian Statistical Institutes well-known papers for the UN,but on the World Banks estimates,which dont use double deflation and are,therefore,wonky any way. They are knowledge proof.
The writer is chancellor,Central University of Gujarat
express@expressindia.com
