Everyone is again a Keynesian now and at economic policy seminars, it is again possible to talk about pump-priming without looking awfully out-of-date. But not all national fiscal pumps can be equally primed. China can spend nearly $600 billion. India neither has the fiscal room nor resources to come close. Some options should simply not be even thought of, like reversing the practice of not monetising deficits. This was stopped in 1997 and restoring status quo ante will be incredibly dangerous given the spending propensities of Indian politics. As for market borrowing, let’s recognise that the government had to suspend borrowing to help correct a liquidity crisis and that issuing a lot of extra government paper will crowd out private investment, surely not a desirable outcome. Plus, big government spending programmes are not implemented quickly, to say the least. So mega projects conceived now will not add the zing to the economy before at least a couple of years, which is no good. Fast tracking projects already cleared and budgeted will be better. An even better countercyclical option exists—this is partly budgeted for, it doesn’t cost much, it puts extra money quickly into the hands of people whose marginal propensity to consume is very high, and it’s a law—the National Rural Guarantee Employment Programme (NREG).
NREG is also crucial because there may be reverse migration as urban unskilled employment opportunities fall—the real estate sector slump, for example—and demand for rural employment goes up. What is NREG’s record? Spending has gone up from Rs 8,585 crore in 2006-07 to Rs 15,786 crore in 2007-08. Employment generation has increased from 884 million person-days to 1,431 million person-days. In the first seven months of this fiscal year Rs 14,448 crore has been spent. Extrapolating for the whole fiscal year, NREG expenditure is likely to be Rs 30,000 crore, almost double the central budget allocation of Rs 16,000 crore for the year. But why stop there? If Rs 50,000 crore is spent on NREG, India will be spending just 1% of its GDP to create employment and increase purchasing power for millions of rural consumers.