Safety, a cost and an opportunity

If safety standards are raised carefully, not only will the public become safer, but the GDP can also grow a little faster

Cyclone Michaung is wreaking havoc in Tamil Nadu. Though 41 construction workers were finally saved from the collapsed Silkyara tunnel after 17 days of rescue operations in Uttarakhand, this happy ending is more the exception than the rule in India.

The lack of safety is actually all-pervasive and runs deep in the Indian system. There is a need for the expansion of safety features in constructions, transport arrangements, working conditions, scavenging, public places, tourism, hospitals, educational institutions, and so on. And, of course, there is a need for air, water, and food that are safe. Also, we need greater safety from “natural” calamities. Finally, citizens require safeguarding from random “factors” such as stray dogs on the streets, road rage, gas leakages, stampedes, spurious liquor, hacking, waterlogging, fraud, sexual and non-sexual harassment, rape, messy electrical wiring on roadsides, trolling, encroachment, loan sharks, and so on.

Higher safety standards have a cost. This is, of course, problematic at the level of a household, a firm, or a public authority. But this holds true at the microeconomic level. At the macroeconomic level, there is actually an opportunity, which is the focus here.

In what may seem a digression, let us revisit the premise that labour, land, and capital are all underutilised in India, though in different ways and degrees. The underutilisation suggests that there is a potential for higher output, if there is additional demand. However, it has been observed that a general expansionary monetary policy or fiscal policy is not useful here as it does tend to be significantly inflationary. This is where a change in mindset is needed to note that a catalyst can take a very different form; it can be higher safety standards!

It is true that when an entity spends a little more on safety, it spends less elsewhere. This may suggest a constant aggregate demand. However, the increase in demand for the output of the “safety industry” under the proposed policy can be concentrated and substantial at any time. On the other hand, many different people will cut down on various other products, doing so in a very, very small way for each. The result is that employment is hardly affected by a small drop in production in many existing industries; primarily, it is the profits that take a small hit there. But new jobs are created and significant profits arise in “the safety industry”.  So, there can be an overall gain. It is not just the reallocation of spending; it also involves utilisation of hitherto underutilised resources.

The point is not that the multiplier effect of additional spending on a particular safety aspect can be high. It is that when spending is increased on a wide variety of safety features, there can be an overall substantial effect. The aggregate turnover in the business sector and the velocity of money in circulation can go up. Higher safety standards create imbalances, which can be conducive to greater economic activities. With forward and backward linkages, the economic expansion can get a little more widespread and even get its own momentum.

Though the change in safety standards needs to be carried out incessantly, it should be a gradual process. There is a need to deal with different sectors one by one. And, the legitimacy of the economic reform needs to be communicated well and on an ongoing basis to increase acceptability.

Of course, under the proposed policy, there may be some bottlenecks. These can create some inflationary pressure but there is room for this under inflation targeting. The Reserve Bank of India has a high 4 per cent inflation target with a big 2 percentage points leeway.

Due to higher safety standards, we can have some minor redistribution in the short run, given that the beneficiaries can be different from those who bear the brunt of the reform. However, we need to also allow for the increased income and the subsequent increased spending by the beneficiaries. That spending can later benefit those who lose financially in the initial stages.

Overall, higher safety standards can contribute to an increase in gross domestic product (GDP) and economic welfare. This rise in welfare is over and above what is attributable to a shift from the prevailing suboptimal level of safety.

The main analysis here differs from but is consistent with the works of A O Hirschman, J M Keynes, V K R V Rao, Paul Romer, and several other economists, though for different reasons in each case.

To conclude, if the public authorities raise safety standards carefully, the public can be safer and the GDP can grow a little faster, not slower.

The writer is an independent economist. He has taught at Ashoka University, ISI (Delhi), and JNU. gurbachan.arti@gmail.com