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  Opinion   Columnists  25 Aug 2020  Mohan Guruswamy | India’s economic challenges: A matter of philosophy

Mohan Guruswamy | India’s economic challenges: A matter of philosophy

The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy
Published : Aug 25, 2020, 6:25 pm IST
Updated : Aug 25, 2020, 6:25 pm IST

The government tends to be “conservative” in its outlook and has made no serious suggestion on an economic stimulus

The fastest growing economies in the world, and its biggest – the United States, China, Japan and most of western Europe -- have the highest debt/GDP ratios. PTI Photo
 The fastest growing economies in the world, and its biggest – the United States, China, Japan and most of western Europe -- have the highest debt/GDP ratios. PTI Photo

The divide between the Keynesians and the Chicago School is as intense and often antagonistic as the Sunni-Shia, Catholic-Protestant or Thelakarai-Vadakarai Iyengar divides.

Now the only dispute on national income is how much will be the contraction. The finance ministry hopes there won’t be any. The IMF has officially said it will be 4.5 per cent.


The rating agencies predict a contraction of 6.8 per cent, while many are suggesting something closer to 10 per cent.

How do we deal with it now? The government tends to be “conservative” in its outlook and has made no serious suggestion on an economic stimulus. What it calls a stimulus isn’t actually one. The problem is more philosophical.

Keynesian economics is a theory that says the government should increase demand to boost growth. Keynesians believe consumer demand is the primary driving force in any economy. As a result, the theory supports expansionary fiscal policy.

The Chicago School is a neoclassical economic school of thought that originated at the University of Chicago in the 1930s.


The main tenets of the Chicago School are that free markets best allocate resources in an economy and that minimal or zero government intervention is best for economic prosperity. They abhor fiscal deficits.

The only reason why the actual stimulus package is only Rs 63,000 crores is the obsession with fiscal deficits by Chicago economists like Raghuram Rajan and his former student, the hapless Krishnamurthy Subramaniam, now chief economic adviser.

They are true disciples of the Washington Consensus to judge countries like India by their fiscal deficit size. The instruments used to beat countries like India into submission are ratings agencies like Moody’s, which just downgraded India.


We shouldn’t lose too much sleep over it.  India is a hardly a borrower abroad and is more of a lender, holding $490 billion as reserves.

That’s why the CEA, asked about a big stimulus, said: “There are no free lunches!” That’s exactly what Milton Friedman said. But they quite happily ignore the fact that America is the biggest deficit financed economy in the world.

Dr Rajan told Rahul Gandhi on his videoconference that a stimulus of Rs 65,000 crores would suffice in today’s situation. Nobel laureate Abhijit Banerjee and former CEA Arvind Subramaniam suggest a stimulus package like the US or Japan.

The US has announced a stimulus of over $3.5 trillion, or over 15 per cent of GDP. Prime Minister Narendra Modi’s stimulus is just 0.3 per cent of GDP.


Many serious economists see fiscal deficits in a positive way. The great John Maynard Keynes believed deficits help countries climb out of economic recession. Fiscal conservatives, however, feel governments should avoid deficits and ensure balanced budgets.

The fastest growing economies in the world, and its biggest – the United States, China, Japan and most of western Europe -- have the highest debt/GDP ratios. Japan’s debt/GDP is over 253 per cent before the latest stimulus of 20 per cent of GDP. China’s debt is over 180 per cent of GDP.

America’s debt/GDP is near 105 per cent, yet it is raising $3 trillion as debt to escape the Covid-19 quagmire.  India’s debt/GDP ratio is a modest 62 per cent, but still it intends to pump in just 0.3 per cent of GDP as stimulus?


Pump priming the economy by borrowing is by itself not bad. It’s not putting the debt to good use that is bad.  Nations prosper when they use debt for worthwhile capital expenditure with assured returns and social cost benefits. But we in India borrow to give it away as subsidies and to hide the high cost of government.

To give an analogy, if a family must make a choice of borrowing money to fund the children's education or to support a man’s drinking habit, the rational choice is obvious.

The children’s education will have a long-term payback, while the booze gives instant gratification. But unfortunately, our governments always make the wrong choices.


If borrowed money is used productively and creates growth and prosperity, it should be welcomed. What we want to hear from the government is not about fiscal deficit targets, but economic growth, value addition, employment and investment targets.

What can Modi do now to get us out of this quagmire? If the government abhors a stimulus financed by deficit financing, there are other options. But the PM is hamstrung with a weak economic management team with novices as the two key players, the finance minister and the RBI governor.

India has over $490 billion nesting abroad earning ridiculously low interest. Even if a tenth of this is monetised for injection into the nation’s economy, it will mean over Rs 3.5 lakh crores. At last count, the RBI had about Rs 9.6 lakh crores as reserves.


This is money to be used in a financial emergency. We are now in an emergency like we have never encountered before. Even a third of this is about Rs 3.2 lakh crores.

There are other sources of funds too but tapping these will entail political courage and sacrifices.

Our cumulative government wages and pension bill amounts to about 11.4 per cent of GDP. After exempting the military/paramilitary, which is mostly under active deployment, we can target one per cent of GDP just by cancelling annual leave and LTC and rolling back a few DA increases.

The government can also sequester a fixed percentage from bank deposits, say five per cent of deposits between Rs 10-100 lakhs and 15-20 per cent from bigger deposits for tax-free interest-bearing bonds in exchange. The 10 biggest private companies alone have cash reserves of over Rs 10 lakh crores.


There’s money in the trees: all it needs is a good shakeup to pick the fruit. The pain of the lockdown mustn’t be borne by the poor alone. The government can easily target 5-6 per cent of GDP, or around 10-12 lakh crores, for the recovery fund as an immediately achievable goal.

This money can be used to immediately begin a limited basic income scheme, by transferring Rs 3,000 monthly into Jan Dhan accounts of BPL people for the financial emergency period; fund GST concessions to move the auto and engineering sectors; begin emergency rural reconstruction projects to generate millions of new jobs and get our core infrastructure sectors like steel, cement and transportation moving again.


Getting money to move India again isn’t a huge problem. What stands in the way are the philosophical blinkers. Call it Chicago economics or the Gujarati mindset.

Tags: covid stimulus package india