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Thursday, December 02, 2021

Instead of focusing on fixing opponents, government should borrow and spend money wisely

The nation is in peril on multiple fronts. The government is busy with non-issues with the sole intent of keeping the people in a trance with the heady wine of religious nationalism.

Written by Yashwant Sinha |
Updated: October 13, 2020 8:44:28 am
A poster of PM Narendra Modi during a function on the inauguration of the First driver less Noida Delhi Metro Rail's Magenta Line in Amity University campus (Express file photo/Tashi Tobgyal)

It has become the primary duty of the government of the day to obfuscate issues through a cocktail of untruths, half-truths, innuendos and pure lies. Yet, like the sun’s rays through a dark cloud, some facts peep out. As far as the Indian economy is concerned, these are the facts. First, the economy went into a tailspin at least eight quarters before the first quarter of the current fiscal, in which the growth rate declined by 23.9 per cent. Just to refresh our memory, the growth rate recorded in the first quarter of 2018-19 was 8.2 per cent. It crashed to 3.2 per cent in quarter four of 2019-20 — a decline of 500 basis points. Second, this massive decline was not due to “an act of God” but due to people who thought they were gods.

Third, the prescription for getting out of the slowdown was suggested by many economists, but the government had no use for it. It refused to believe that demand deceleration was the root cause of the malaise and kept trying other expensive measures, which had no bearing on the problem at hand. Naturally it did not work. Fourth, it was crystal-clear that the problem was created by the thoughtless step of demonetisation which dealt a body blow to the economy. Nobody in the government today talks anymore of the wonders it did as it failed to achieve its objectives. According to the latest report, the cash-to-GDP ratio has increased to 15 per cent — the highest since Independence.

Fifth, as if the damage to the economy was not extensive enough, the government came out with an ill-advised and badly crafted GST, which, instead of being a shining example of cooperative federalism for which I had laid the foundation by creating the empowered group of state finance ministers for VAT, has now degenerated into a dangerous showdown between the Centre and the states. Sixth, despite being fully aware of the delicate health of the economy, the government imposed a mindless lockdown which sapped the economy of whatever life was left in it. Seventh, the decline in growth rate recorded in quarter one of the current fiscal is the highest amongst all major economies.

Eighth, the government is bankrupt and if it had not been for the extortionary levies on petroleum products in the face of crashing international crude oil prices, the position would have been worse. Ninth, healthy agricultural output as a result of successive good monsoons has sustained the rural economy, though the farmers continue to suffer. The government cannot claim any credit either for declining global crude prices or for the good monsoons. Tenth, fudging of figures, suppressing unwelcome data, opaqueness like in the PM CARES fund, electoral bonds and foreign contribution to political parties have become the hallmark of the government. And lastly, the only thing which is flourishing is the stock market, which has been firmly in the grip of speculators during the pandemic. But all this will not fill the empty stomachs of people.

These are truths, which cannot be concealed despite the Goebbelsian efforts of the government. The bigger reality is that the people are undergoing untold suffering and paying a heavy price for the follies of the government.

A crisis should never be wasted; this one in particular. It is a golden opportunity to build. Why did John Maynard Keynes suggest that people should be engaged in digging ditches and then filling them up? It was in order to ensure that money reached people’s pockets so that demand could accelerate. In our context today, it means providing gainful employment, creating durable assets and strengthening physical infrastructure. We still need to build millions of miles of rural roads, provide housing to all, build new cities and villages with modern facilities, improve health and educational facilities, construct national highways, railway lines, airports, ports, promote defence and tourism infrastructure. These are the “ditches” we must start digging today.

Where are the resources for all this? Again, my simple logic is this: Taking a loan is not such a bad thing, provided you create the capacity to repay. For example, if I were to take a loan to set up a business and a successful one, I shall have no problem in repaying the loan out of its income. But if I were to waste that money on current consumption, I shall find it difficult to repay the loan. I applied this simple logic to government’s borrowings also while designing the Fiscal Responsibility and Budget Management Bill. India could live with small doses of deficits on the capital account but the revenue deficit had to be completely eliminated. We are still pursuing that goal which remains elusive to this day.

So, let the government go ahead and borrow, even print notes to garner resources. This money should be spent, not recklessly, but wisely. Some of the steps will create jobs sorely needed in these difficult times. Some may take time until the plans are firmed up. Demand for both consumption and investment goods will go up, leading to better utilisation of existing capacity and creation of fresh capacity. Better infrastructure will also reduce the transaction costs in the economy, making it more competitive. It will unleash a virtuous cycle, leading to full revival in quick time. Paying the debt will pose no problem when it becomes due. Is the government game for it?

The nation is in peril on multiple fronts. The government is busy with non-issues with the sole intent of keeping the people in a trance with the heady wine of religious nationalism. The ruling party may go on winning elections, toppling elected governments, misusing the agencies of the government to fix its opponents and establishing its monopoly over power, from cricket to courts of law. But what about India?

This article first appeared in the print edition on October 13 under the title “Never waste a crisis”. The writer is a former Union finance minister

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