The nation is suffering the consequences of the shortsighted economic policies implemented by the previous UPA Government. The UPA had implemented the MGNREGA and loan waiver schemes in its first term. These schemes provided relief to the common man. The UPA was rewarded by the voter in 2009 for this largesse. But these programmes had negative impact on the economy. The government had to cut investments in highways, bullet trains, digital governance and fighter aircrafts because the budget was used up in these populist schemes. The problem was compounded by the widespread corruption at the highest echelons of the government. The money was leaked from the coffers of the government and invested abroad, sent away for the import of gold, or invested in real estate. As a result, the economy deflated just as a person is weakened if he sells his blood to the blood bank continuously.
The government’s revenue was leaking which was made up by printing notes which led to inflation. The prices in the vegetable market increase during the marriage season because large numbers of new buyers come into the market with bundles of currency notes in their pockets. Similarly, prices increased because the UPA Government entered the market with newly printed notes. Such printing of notes would be acceptable if the notes were spent in productive investments. Say, a government prints notes worth Rs 100 crores and uses these to build a highway. The prices will increase because of the influx of these newly printed notes in the market. However, the highway will lead to lower cost of transport and lead to lower prices when the highway is built. Thus the increase in price will only be temporary. The impact of the same printing of notes would be altogether negative if the notes were used for increasing consumption through MNREGA or corruption. Such a use of printed money for increasing consumption leads to “stagflation,” that is, stagnation plus inflation. The growth remains placid because new investments do not take place but prices rise due to printing of the notes.
The NDA Government inherited an economy that was mired in stagflation. The NDA has cleaned up corruption in high places. A knowledgeable person told me that a union minister gave instructions that the food should be arranged at no more than Rs 100 per plate for an official dinner so that he did not attract the ire of the Prime Minister! Such scrutiny and control of government expenditure is wholly welcome. The problem is that there is no growth either. The single point focus of the NDA Government is to control price rise. This has led to the government not making the expenditures that are necessary to jumpstart growth. As a result, we have an honest but a laggard government.
The claims being made by the government of seven percent plus growth appear to be fudged. The mechanic who repairs my car said that he had more work than he could handle during the UPA Government. Nowadays he has no work. He sits idle hoping for some customers to drop in. Car owners are not even getting the regular servicing of their cars done because they do not have the money. They are getting service done after 10,000 kilometers instead of 5,000 kilometers previously. Other indicators of growth such as generation of employment and increase in bank credit also do not show buoyancy. It must be remembered that the growth rate is calculated by government officials on the basis of data collected from the field. Many assumptions are made in making the calculations. For example, it may be assumed that the industrial output in all districts of the country is equal to the output observed in Gurgaon. Instructions can be given to show increased production of agricultural crops. It is easy for the data to be manipulated. The NDA Government has led the economy into a deflationary path by not making the necessary investments.
The challenge is to control prices and yet take the economy to a high growth path. It is necessary to increase investments for this purpose. Notes cannot be printed and used to make investments because that will lead to increase in prices. Money cannot be borrowed and used to make investments because that will lead to increase in the fiscal deficit and kill the little private investment that is happening. Make in India program is floundering because foreign investors follow domestic businesses. Large numbers of studies show that foreign investors come only when the domestic investors are active. Indian businessmen, however, have clammed up because there is no demand from the government for building of highways. Thus foreign investors are sitting on the fence waiting to see if the domestic investors bite the bait.
There is a way out of the situation if the government borrows money from the global market and makes investments in the country. Say the government borrows Rs 1000 crores from New York and invests the money in making the bullet train; it imports cement, steel, engines and coaches and builds the train. Such import of cement and steel will not lead to an increase in price in the domestic economy because the demand and supply will remain unchanged. It is like a person taking a loan to purchase a refrigerator. Budget of the home would remain unchanged. He would be able to repay the loan from the savings made in the purchase of vegetables from the weekly market instead of buying them daily from the street corner shop.
The government must make ambitious investment projects in the areas of space exploration, generation of energy from thorium, making a network of bullet trains across the country, and connecting all government offices digitally. The government should raise loans from multilateral agencies like International Monetary Fund, World Bank, and private banks and make these investments. This source of investment will not lead to an increase in prices because the supply and demand in the domestic market will remain unchanged. It will not lead to an increase in the fiscal deficit because loans may be taken by Public Sector Companies rather than the government. It is necessary to break the low investment climate to take the economy to a high growth path.
Author was formerly Professor of Economics at IIM Bengaluru
