Shift from supply-side fillip to demand boost in Budget: Amit Mitra to FM

In a letter to Nirmala Sitharaman, West Bengal finance minister Amt Mitra suggested the Centre follow Keynesian economics at this juncture instead of Say's law

Ahead of the Budget for 2021-22, West Bengal finance minister Amit Mitra has criticised the Centre for its supply-side stimulation of the economy at a time when the Covid-impacted system needs demand side booster dose. He wanted the Centre to correct this flaw in the policy.

In a letter to union finance minister Nirmala Sitharaman, Mitra suggested that the Centre follow Keynesian economics at this juncture instead of Say's law. 

"You may consider taking a Keynesian approach as was done by other nations rather than relying on Say's Law," Mitra suggested to Sitharaman. 

The Keynesian approach, named after British economist John Maynard Keynes' prescriptions, basically calls for boosting aggregate demand during a downturn and rejects the idea that free market economies have self-balancing mechanisms that lead to full employment. 

On the other hand, Say's law, named after French economist Jean-Baptiste Say, is based on the premise that supply creates its own demand. It is the claim that the making of a product creates demand for another product by providing something of value which can be exchanged for that other product. It is this law that Keynes had rejected. 

While thanking Sitharaman for holding pre-Budget meeting with state finance ministers last week, Mitra recalled, "I have publicly stated that demand-stimulation through cash in hand for the common people should have been the appropriate policy for getting the economy out of the slump hit by the pandemic. Most of the countries have adopted this policy."

However, the Centre has followed supply-side stimulation by reducing corporate taxes and trying to facilitate credit to businesses rather than cash transfers for demand stimulation. 

"It is my considered view that the supply side stimulation being followed by your government is in error and it is failing to check the contraction of the GDP which probably stands at the highest for any nation in the world," Mitra wrote. 

India's GDP declined 23.9 per cent in the first quarter and 7.5 per cent in the second quarter of 2020-21. The economy is officially projected to shrink by 7.7 per cent in the entire year. 

Mitra suggested to Sitharaman that the Centre should borrow the entire Rs 1.82 trillion and lend it to the states as GST compensation shortfall for 2020-21 and not just Rs 1.10 trillion that it is doing currently. 

He also  asked her to raise the state's fiscal responsibility and budget management (FRBM) limit to five per cent of their respective state GDPs without any condition and not continue with the current riders imposed on such a limit. States are allowed to borrow up to the point that their fiscal deficits do not breach three per cent of their respective GSDPs. However, for the current financial year, the Centre allows the states to borrow unconditionally up to four per cent. Beyond that, they can go up to one per cent of GSDP if they undertake reforms such as one nation one ration card etc. 

The West Bengal finance minister also asked Sitharaman to correct the Centre's recent stance of imposing more burden on states for centrally sponsored schemes in the upcoming budget. He also wanted the union finance minister to restore the date of devolution of funds to the states to first of every month from the current 20th. 

Mitra also raised some state-specific issues, saying these have ramifications for other states. For instance, he said the Centre has providing enough grants to the state for fighting Covid-19. The  state has spent Rs 4,000 crore to combat Covid-19, but the state has received only Rs 279 crore from the Centre. Though the Centre has allowed the state to spend 50 per cent from the state disaster relief fund for this purpose, the allocation to this fund has not been increased from a mere Rs 1,000 crore this year. Mitra said the state would need Rs 11,387 crore to tackle the pandemic in the current financial year. 

He said the state has asked for Rs 35,000 crore from the Centre for a claim on destruction caused by cyclone Amphan and relief and rehabilitation work done by the state. However, only Rs 2,250 crore has been provided by the Centre. He has also asked the Centre to devolve the remaining amount of around Rs 10,000 crore to the states for April-December, 2020-21 period.