How growth and equity get a boost in Finance Minister's economic stimulus package
FM Nirmala Sitharaman’s first tranche of announcements of the fiscal stimulus for economic recovery closely follows PM Modi's vision of making the economy self-reliant.
While Finance Minister Nirmala Sitharaman’s first tranche of announcements of the fiscal stimulus for economic recovery on Wednesday has been subjected to both criticism and accolade, PM Modi’s vision with the allocation of Rs 20 lakh crore needs a broader understanding. The grand vision is meant to serve two objectives: to restart an economy that has come to a halt, and to make the economy self-reliant.
Self-reliance mantra
While the first objective is an obvious choice to pursue to move out of the dungeons of a languishing locked-down economy, eyebrows may be raised with the second objective. Does “self-reliant” imply following the trend of nationalistic fervour emerging from a xenophobic discernment followed in some nations? There is no problem in being self-reliant even if it is interpreted as nationalistic.
An econometric exercise shows that economies with the highest levels of exposure to China either through BRI or otherwise are the ones most affected by Covid-19. This economic openness is delineated by three variables, namely, human capital movement, international trade and foreign investment. Italy, one of the highest Covid-affected nations, was not only China’s largest cooperative trade partner but ever since the nation became a BRI member in 2019 it emerged as one of the major destinations of Chinese FDI. There is enough evidence of extensive human capital movement to Iran as also of high Chinese investment. Similarly, high export exposure of South Korea to China often occurs through assembly lines before being re-exported to other nations.
While the infection is caused by the physical proximity of citizens of affected countries, at a more macro-scale there is substantial evidence about the role of trade, investment and human capital movement in transmitting the virus. It’s obvious that economies will take counteractive measures through the closure of borders. Trade routes are seen with suspicion, and investment in foreign destinations to exploit the global value chains (GVCs) in usual destinations will be cast with doubts.
It is, however, a fact that India’s share in the GVC is substantially low. At the same time, it needs to be remembered that China, the nation that essentially conceptualised the plan of BRI, is also the one that tacitly acknowledged the importance of “self-reliance” without explicitly placing it in their five-year plans. Their model of “consumption-led growth” stands on the pillar of domestic purchasing power.
China realised that their earlier philosophy of “export-driven-growth” would fail after a host of global economic crises mostly hit the EU thereby negatively affecting consumption demand. Hence, with an unreliable external sector that is contingent upon the vagaries of world trade and finance, a more reliable growth force needs to be created within the domestic economy to provide the right type of cushion.
Focus on Capital
PM Modi’s idea, to a certain extent, follows these lines, but as evident from his speech as also from the announcements from FM Nirmala Sitharaman, it extends beyond that. The “self-reliance” is not merely from creating a robust consumption base that will be the driver of the economy, but also to create processes that will steer the economy to prosperity. Therefore, slightly in contrast to the classical economic thinking of factors of production in the form of land, labour, capital and enterprise, the PM emphasised the need to address land, labour, liquidity, and laws.
Laws need to evolve with time whether in the context of land or labour or finance or infrastructure. They create institutional processes. If they do not keep with times, they increase the “transaction costs” of doing business manifold. These non-monetised “transaction costs” occur in the forms of delays in processing, costs of acquiring information, bureaucratic shackles, Unfortunately, these transaction costs often do not feature in the Ease of Doing Business indices.
The inherent problem with the World Bank EoDB index is that it hardly captures the ground-level realities. However, the PM talked about interventions in supply-chain that has been the most major bottleneck in agricultural marketing processes. Such bottlenecks have led to food inflation on one hand, and farmers’ distress on the other. On the same note, it seems that there will be clear interventions on at least two the four-capital perspective of development: physical capital and human capital.
Kickstart the economy
The two other forms of capital, namely, natural capital and social capital are also important, and all four, when combined, can create a lucrative investment destination, thereby helping “Make in India”. Therefore, “self-reliance” need not be seen as an insulating tendency or “import substitution”, but as a phenomenon to create a more robust system with enabling parameters to attract both foreign and domestic investments.
In an economic system left to work by itself as has been the case of India so far, markets have emanated forces to take care of the problems so far. However, the lockdown blocked the working of the market forces. So, it is important for the government to plunge in with a “Keynesian” response of interventions. What seems good about the PM’s speech is that growth concerns are integrated with concerns of equity.
It was implicit in the speech that the economy can kick-start with equity concerns getting addressed. This seems to be the hallmark of our neo-pandemic economics: how that unfolds over time will depend on the FM’s subsequent package announcements.
(Courtesy of Mail Today)