Column: Mapping Modinomics and the new Cabinet

May 28 2014, 04:40 IST
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SummaryThe new PM’s initiative of coalescing ministries is consistent with the idea of supply-side economics

Macroeconomic thinking has evolved from classical economics to Keynesian to neoclassical synthesis, to post-Keynesian to monetarism, and now the new classical economics and supply-side economics. If we have to place Modinomics in the over-all map of macroeconomic thinking, it would be most similar to the new supply-side economics. This school of macroeconomics argues that economic growth can be most effectively created by lowering barriers for people to supply goods and services as well as by investing capital. According to this strand of literature, economy benefits from a greater supply of goods and services and from investment and expansion of businesses.

One can read the tea leaves of Modi’s economic thinking from his choice of the Cabinet. As he took oath as India’s 15th Prime Minister, he ushered in significant changes in administration, dismantling existing structures by merging key ministries in an apparent attempt to bring in more synergy in governance and make decision-making quicker and more efficient. For now, he and his council of ministers make for a total strength of 46, compared to the more-than-seventy in the last two UPA regimes. The number may go up slightly as tweaks follow over the next few months, but is likely to remain around fifty—a one-third reduction from the previous regime. This idea of “minimum government and maximum governance” is most consistent with supply-side economics which argues for a leaner government and exploiting synergies among various aspects of governance. Many of the small ministries have been merged to create more synergies. For instance, corporate affairs ministry has been brought under the finance ministry. Similarly, coal and power sectors—interlinked through fuel supply and generation linkages—will be overseen by a single cabinet minister. The panchayati raj ministry has been merged with the rural development ministry. The planning and statistics ministries, required to work in close coordination with each other, will have one minister.

Modi’s initiative of coalescing ministries is consistent with the idea of supply-side economics, that progress comes from recombining the manner in which resources are used in many different activities, however small. Developing several growth areas, each contributing a share to overall growth is conducive to broad-based and resilient growth.

This idea of supply-side economics is in contrast to the demand-side emphasis of Keynesian economics. The essence of Keynesian analysis is its conclusion that the level of national income and employment depend on the level of aggregate demand and that easy money and expanded budget

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