Crises act as the catalyst of change. The COVID-19 pandemic has caused massive disruptions to markets, supply chains and economies as whole, forcing us to rethink how we look at the functioning of modern economies. Fiscal austerity, a reduction in government spending in order to reduce budgetary deficits, has ruled modern economic policy making for the developing world, with fixed fiscal deficit ceilings becoming the norm worldwide. The NDA II government having announced a slew of fiscal measures to revive the economy, have simultaneously tried to adhere to the fiscal deficit ceilings set. The result: insufficient aggregate demand to revive a faltering economy.
Modi’s announcement of a stimulus package of up to INR 20 lakh crore (10 per cent) of the GDP has failed to address the dire requirements of the country. Modinomics’ complete disregard for the paradox of thrift in its stimulus package was rather evident, with various economists and experts stating the direct fiscal stimulus from the Centre adds to a little over 1 per cent of the nation’s GDP. With liquidity transfusions by the RBI accounting to a little over 8 lakh crore, it fails to address the critical Keynesian aspect of the need for more spending, more risk-taking and fewer savings as a response to an economic recession.
Keynes’ economic response to crises has been overshadowed by the growing reliance on unconventional monetary policy tools, i.e. Quantitative Easing and Negative Interest Rates. Economies clawed their way out during the 2008 economic recession with a strong dependency on these tools, while allowing nations to adhere their fiscal deficit ceilings.
While Keynes emphasized on the importance of balanced budgets in the long run, and understood that time lags may make fiscal policy a second best solution for a recession, he advocated for the need for the socialization of investment in response to faltering aggregate demand. The Socialization of Investment, does not infringe on our existing economic structure, rather, it helps maximize outcomes. It is a gradual adjustment between the propensity to consume while inducing investment for the primary purpose of guaranteeing an adequate level of effective demand that is in line with full employment levels. It was not devised as “a terrific encroachment on individualism, on the contrary…as the only practicable means of avoiding the destruction of existing economic firms in their entirety and as a condition of successful functioning of individual initiative” (The General Theory of Employment, Interest and Money, 1936, p. 380).
The COVID-19 pandemic has exacerbated the need for the socialization of investment across India. India’s weak expenditure outlay on healthcare and education has caused severe strain on the entire system while highlighting how poorly our budgetary allocations have been made over the years.
Vietnam has been lauded as a success story for being able to contain the spread of the virus effectively with no recorded deaths, as of 30th July. The strength of its public health system, clear risk communication and Keynes idea of Socialization of Investment have been at the fore. Vietnam contained the COVID pandemic so effectively and rapidly, given it’s huge outlay on public health. This has allowed the state to deal with previous viral outbreaks, while effectively containing and eradicating them.
Many Indian states have failed to address the dire need for the socialization of investments and therefore lag behind multiple parameters in welfare outcomes. It further exacerbates India’s inability to handle crises, and with a vibrant young population, India’s dreams of tapping into its demographic dividend are fading away, as investments needed to boost aggregate demand are either non-existent or funneled into the wrong channels.
The notion of achieving the USD 5 trillion target by 2025 currently seems farfetched. Our demographic dividend is weaning off, and all the potential that India once was touted to be capable of, are slowly fading away. The pandemic has exposed the cracks within the system, and there is a need to drastically relook at the way India’s policy framework is structured. It is imperative that fiscal deficits in the short run be overlooked with the overarching need for socialization of investments across the spectrum be at the fore to help tide over the recession and boost aggregate demand.
Anamika Shah
