The Hindu Business Line : Why Keynes will fail in India

Good governance is a non-negotiable pre-condition for Keynesian solutions to work. This is completely missing in India, says T. C. A. SRINIVASA-RAGHAVAN.

Good governance is critical for the success of Keynesian solutions.

On October 14, in an article titled ‘Tweaking John’ I had pointed out how, globally, governments were distorting Keynes. Instead of helping the real sector, which is what Keynes had in mind, they were doling out tons of cash to banks, insurance companies etc. which would simply soak up the money and the much-needed Keynesian multiplier would not come into being.

Seventy-five days on, when the comatose financial sector has been doused in painkillers and antibiotics, but is still in the ICU, governments have started helping the real sector. Well, good, you’d say except that they have once again got Keynes all wrong.

Saving balance-sheets

Keynes wanted the government to spur aggregate demand by spending on things that helped everyone, not just some shareholders. That is why he emphasised public works. But governments are now busy saving balance sheets. They should, but not by direct injections.

After all, why should a taxpayer be made to pay for the mistakes of some bad decisions by directors? Even if there was a genuine error of judgment about the likely business environment, why should the cost of helping them out fall on the taxpayer when he or she was not sharing the benefits when the times were good?

True, a person could have become a shareholder, but that would have meant exercising a choice, which is right. But now taxpayers are not being allowed to do so. Whether they like it or not, their money is being given away to small groups of persons, some of whom may well have avoided or evaded taxes and, thus, become richer than those who paid their taxes.

Fortunately, our government, which has its own sneaky ways of helping the private sector, has not yet started handing out truckloads of cash to companies. Nor, given the political, social, intellectual and cultural ethos, is it likely to do so.

Unwilling to bid

But we should not draw too much comfort from that. Its reluctance to directly give money to firms in trouble does not mean that it will be able to implement the Keynesian orthodoxy by undertaking public works directly, or enabling the private sector to do so.

The recent experience of NHAI’s attempt to invite bids for building roads is a case in point. It shows that potential bidders are totally unwilling to bid because of governance issues, which is a euphemistic reference to extortion by politicians and other mafias.

Several other ministries will tell you the same story. The government can dangle the carrot but no one will take a nibble because of the extra-constitutional taxes levied by the political mafia.

As the latest outrage in UP shows, where a PWD engineer was beaten to death by the ruling party’s goons for refusing to hand over a few lakhs of rupees, allegedly for the chief minister’s birthday bash, we have reverted to the days when agents of the state were free to extort what they wanted from the peasants at the pain of death. Only targets for collection mattered.

UP is not the only place where this is happening. In differing degrees, this is true of practically every state. The proximate cause is the forthcoming general election. But with elections having become a perennial feature, the problem has gone from being a seasonal to a perennial one.

Cost of elections

The deeper underlying cause, however, is cost of elections. MPs confirm that a Lok Sabha seat can cost between Rs 8-12 crore to contest, let alone win. If there are two serious candidates, that means around Rs 20 crore per seat. Multiply by 544 and you get Rs 10, 880 crore per election.

This is the minimum that the political system has to generate for just one general election. Add the assembly and panchayat and other elections, and ‘leakages’ to the personal account of the collectors, and you begin to see what has happened.

Only about 10 per cent comes from the parties. The rest has to be found by the candidate, an increasing number of whom are criminals. Soon they will dominate the legislatures, and therefore the governments.

NHAI experience

This is where good governance becomes a casualty: It is inimical to election funding. Both cannot co-exist. One gains at the expense of the other.

But as the NHAI experience shows, good governance is critical for the success of Keynesian solutions. If 10 per cent of the likely profit has to be paid upfront to the mafia, sometimes even as you put in the bid, why would anyone bid? If the ministers take 4 per cent of contract value, why would anyone bid? If the police take one per cent, why would anyone bid?

Bidding pattern

First-year students of economics, in the very first term, are taught a very useful tool, namely, the difference between necessary and sufficient conditions. It is worth drawing the prime minister’s attention to that

Thus, to boost the overall level of demand in the economy, it is necessary that the government spend money. But is it sufficient? Dr Singh is doing what is necessary; but will it be sufficient if governance is what it is?

One only has to analyse the bidding pattern, including who is bidding (because those who bid may well be fronts for politicians) to see why the Keynesian solution will not work in India.

This is yet another instance, as in the case of our democracy, of our adopting the letter but ignoring the spirit.

( blfeedback@thehindu.co.in)