Sudhir Mulji: Deficit-induced investment

The NDA lost because it did not make enough public investments

Three months ago I asked Surjeet Bhalla to suggest a topic to write upon for this column. He promptly answered, "The election's the only issue readers are interested in."

Unfortunately I have no taste for psephology or for forecasting outcomes which seem to me as much a matter of speculation as analysis.

However some years ago I had argued in one of my columns that Manmohan Singh and Sonia Gandhi could be a winning combination; and it is now one that is about to happen.

Sonia's charisma flows not from her Italian origin but the fortitude with which she has borne the grief of her widowhood. I then likened her to the Homeric portrait of Hector's widow Andromache, perhaps one of the most poignant heroines in mythology.

If such classical imagery serves any purpose, Manmohan Singh must be Ulysses. He has the uncanny knack of steering his ship through the choppy waters of Indian politics. In choosing him as her standard-bearer Sonia has shown a shrewd wisdom.

Having said that much about politics I have exhausted my analytic skills of political events; what is perhaps more up my street, though this subject is equally speculative, is the cause of NDA's defeat and the lessons to be learnt from it.

I should stress that I am an arm-chair critic, for I have not even once attempted to survey the field beyond the confining realms of Chanakyapuri in Delhi.

However my narrow field of vision has not prevented me from reading or thinking, the latter albeit with my pre-judgements intact. Further the benefit of hindsight clarifies thoughts most remarkably.

In recent articles I was struck by veteran journalist M J Akbar's comment in The Asian Age of May 17 that what misled him and other political analysts was Vajpayee's excellence as prime minister; in every respect he combined both nationalism and skills of running a coalition.

But Akbar admitted to one weakness in the prime minister and that was "his rudimentary understanding of economics...he left implementation (of economic policies) to those who could not see beyond middle class India".

Akbar then went on to demonstrate his own economic ignorance by arguing that the finance ministry had signed the death knell for the NDA, by a broadcasting cant about "India Shining" to the poor, who were alienated from the prosperity they could not participate in.

It would be a great error to underestimate the substance behind the reforms that were the under-pinning of the "India Shining" image.

The requisite policies as regards the exchange rate and taxes were fundamental to any hope of transforming the poverty of Bihar and UP, and even the relative prosperity of Kerala and Mahrashtra.

That the earliest beneficiaries of reforms were the middle and upper classes should not blind us to the necessity of the changes that were required.

Whether policies of privatisation are continued or prevented will now be a matter for the new Congress-led coalition; but as an ex-public sector chief, I can only assure the Left that no public sector company can be run with any degree of efficiency under the present bureaucratic structure.

It is all very well to talk of their strategic and shining value, but the extent to which they are undermined continues, those responsible being mainly the Left in conjunction with CBI.

NDA policies failed in privatisation not because they were not careful enough to get the right price, but because they were too careful. Too much time was wasted in debating the best solutions rather than implementing policies with a swift stroke. I expect the Congress coalition will fail in precisely the same manner.

If there is one economic failure that Vajpayee's government can be held responsible for, it is their excessive concern about fiscal deficits. Here I go back to my own prejudices, for I recognise that among orthodox economists, including perhaps Manmohan Singh, there is no great appetite to use public finances in a radically different way.

Deficits, which are anathema to the IMF-World Bank group as well as to the economic bureaucracy and orthodox economists, were not used by the BJP government to conduct those activities which could have provided the human face of capitalism. Instead Jaswant Singh was persuaded to take that silly Bill on Fiscal Responsibility seriously, not that he could do anything about it.

It was to my great delight that I reread an article and its rejoinders by that great economist the late Professor A K Das Gupta on "Keynesian Economics and Under-Developed countries" and lessons to be learnt from them.

He has produced intellectually the most interesting arguments about deficit financing. This is his centenary year and there is every possibility that more of his seminal work will soon be available to modern economists and journalists.

In his 1987 Economic and Political Weekly articles Das Gupta opposed deficit financing for India on the grounds that there was no aggregate demand deficiency in the Indian economy to justify Keynesian policies; on the contrary our experience had shown that deficit induced investment resulted in rising prices and wages.

He argued that "The central problem of the Indian economy "" mass unemployment and poverty "" was to be explained in terms of insufficient accumulation of capital."

But Manmohan has changed things since 1987. By reforming the exchange rate he opened India to the world for capital.

As Bimal Jalan puts it, "I believe today India is in a position to do what it wants to do. If we want the best of anything "" airports, roads, ports, we can have it because today we do not have resource crunch of any kind." (Business Line, May 18).

Jalan may have exaggerated, but while we do not need to build airports and ports we certainly do need public health, education, jobs and agriculture.

This is what the NDA promised and did not fulfil; and the excuse that the finance ministry has always been able to trot out has been to repeat that deficit financing would be irresponsible.

As a result NDA failed to do precisely what Vajpayee and Jaswant Singh promised but failed to provide. They claimed to make resources available but did not ensure adequate action.

This gave Sonia the opportunity to point out from the gardens of Anand Bhavan, the Nehru ancestral home, that jobs were not being created, and it was not even necessary to tour the countryside to realise this. It was blatantly clear outside the gates of her own house.

Hicks tells us that "Keynesian economics...can no longer say to the statesman Fays ce que vouldras" ("Do what you will" in old French). Nor perhaps like Jalan should we assume that we can have the best of anything we want, but by making ourselves attentive to the fluctuations of expansion we can and should be able to do much more.

This is neither the time nor place to discuss the prospects of deficit-induced investments, but in the spirit of Das Gupta the time has come to revisit the topic of "Keynesian Economics in Under-Developed Economies" again.

The task of how precisely we can ensure that attempts to rebuild public investment are not frittered away through price and wage increases is not easy; but to fail to give deficit-induced investment even a trial is to guarantee self destruction the NDA way.

sjmulji@aol.com