The finance minister recently announced a plan to invest Rs 102 lakh crores over five years to develop social and economic infrastructure to boost India’s falling growth. Can such an Infrastructure push, revive economy and boost employment opportunities or would this just be boondoggle? Paul Samuelson, an American economist, who won the Nobel Memorial Prize in Economic Sciences in 1970, had once said “Let’s suppose that I hire unemployed resources to build a $1000 woodshed. My carpenters and lumber producers will get an extra $1000 of income. If they all have a marginal propensity to consume of 2/3, they will now spend $666.67 on new consumption goods. The producers of these goods will now have extra incomes. They in turn will spend $444.44. Thus an endless chain of secondary consumption re-spending is set in motion by my primary investment of $1000” The Keynesian theory, that an underproductive economy can be spurred back to full output by using new public expenditures to boost aggregate demand also corroborates the same idea. The assumption here seems to be that the infra push, generates new employment opportunities and jobs for unemployed youth, who then receive a remuneration which, if spent quickly, will promote further growth. However, aggregate demand never equals the productive capacity of the economy, since it is influenced by many factors and behaves erratically, affecting production, employment, and inflation.
The current aggregate demand is volatile and unstable as the market economy is experiencing an economic recession due to low demand affecting several businesses. Will more insolvencies be filed if the market stays irrational longer? The disquietude was sought to be mitigated by certain economic policy measures taken by RBI and the resolve of the government to help stabilize output over the business cycles. But has the government or the RBI factored in the lost opportunity costs if there is deficit spending or a higher-than-normal unemployment rate? What if the supposed incentives of supply-side economics fail to materialize? People may not work more, they may not save or invest more than they did before, and what if the benefits get stuck at the very top of the income distribution? The important question is, does managing the market economy by the government, predominantly of the private sector, help in the modern-day context of economics?
“Cantillon effect” so termed after Richard Cantillon another economist in the 18th century, can sway and skew the macroeconomics and Keynesian theory. In simple terms, if the RBI pushes more money into the economy, the resulting increase in prices is always uneven. The new spending may increase prices and demand in some areas faster than others. The private enterprise may actually change the production patterns to cater to the short-term demand. This may in the short term reduce unemployment, but actually may raise it in the long term. The government does not have an effective feedback loop to gauge its interventions, unlike the private sector, because governments do not produce anything with a calculable market value, for their revenues are not based on consumer valuations.
Does the private sector shrink by a corresponding amount that the government spends? Instead if the government spends through government bonds, will current capital markets lead to a reduction in private investment spending, due to increased interest rates and dampen the spirit of total investment? All this can render improvement in macroeconomic outcomes of GDP and increased job opportunities redundant.
Can we have effective empirical forms to show the effectiveness of such infra spending? In a 2014 working paper for the IMF, economist Andrew Warner found little evidence that global infrastructure projects produced economic gains, even when projects received credit for growth. On the contrary, Warner found that the economy was already improving at a similar rate by the time construction began.
The government investment of Rs. 102 lakh crore is in energy, roads, railways, and irrigation sectors, rural and urban infra projects, in social and industrial infrastructure, developing new sea and air ports, in agriculture and food processing, and in telecommunications sectors. 42% of these projects are under implementation, 32% under conceptualisation and the rest are under development according to a government source. The Central Board of Direct Taxes (CBDT) has collected Rs 11.17 lakh crore in total direct taxes in FY 2018-19. The Gross tax revenue for 2018-19 period is reported at Rs. 22.7 lakh crore. The overall government expenditure in the Union Budget 2018-19 was estimated around Rs. 24.42 lakh crore. As elections near, increased social sector spending may take precedence. Under GST, the tax levied on consumption of goods or rendering of service is split 50:50 between the Centre and the State. With several States yet to get their share, the revenue expenditure equation further gets contorted. States ruled by different parties may have their own priorities, further complicating the macros. In such complex dynamics, how the deficit will be met, will truly influence the outcomes of the investment itself, for the source is as important to the outcomes, as is actual spending.
Probably it is time that the States invest their share in infrastructure push, be it surface transportation, railways or airports or public buildings or even water treatment systems and other infrastructure to create good employment opportunities. The States must coax the industry czars to modernise and innovate. This is the key to economic growth recovery. Merely cutting taxes, waiving off farm loans, offering freebies and corporate giveaways may not be the answers we seek. Reforms in State autonomy and decentralisation which are difficult subjects, may have to be addressed in earnest.
Spending by the government on roads, bridges, metros, smart cities and such other projects, is one of the most advertised tools of anti-recessionary fiscal policy. Even Donald Trump, is looking to push for a prodigious $1.7 trillion infrastructure plan in a renewed push for the Presidential throne. Why is everyone doing so? Political parties and decorated economists seek large infrastructure spending as a form of stimulus to revive failing economies. However, what is not answered is, if there is any evidence, empirical, statistical or any other of public infrastructure projects actually boosting economy, or even enhancing the net employment figures. Should this be seen as disconnect between political rhetoric, political theory, and economic reality? Prudency demands seizing the opportunity in the crisis, if we were to surge ahead to a five trillion-dollar economy.