Column : How to spend 0.6% of GDP

Written by Bibek Debroy | Updated: May 16 2009, 07:11am hrs
Negative indicators like IIP (index of industrial production) show images of the past. Courtesy time lags, what else should one expect The present isnt that bad and augurs well for the future. The worst is over. The RBI governor has just told us that. Business confidence has improved. FMCG, capital goods, cement and steel have perked up, not to speak of a good monsoon and rabi sowing, fuelling rural demand, and Sensex. Fear not the future, weep not for the past. The 5.5% growth in second half of 2008-09 is the past. The present (2009-10) is 6% and the future (2010 onwards) is 7.5%, though not 8.5%. The title of Shelleys poem (The Revolt of Islam) may be inappropriate. But the quote is not. After all, it does talk about darkness in the North and no one knows when the developed world will recover, or for that matter, Indias exports. Why has recovery occurred It cant be loosening of monetary policy. After all, RBI itself has catalogued time lags, problems with transmission mechanisms, government borrowing and floors on interest rates set by small savings. Banks are being true to their own selves and are refusing to be lenders. So far, North Block hasnt shown more success than Polonius and we shouldnt forget that Polonius eventually got himself killed.

It cant be fiscal policy. Post-September 2008, that was a measly 0.6% of GDP and public expenditure has doubtful efficiency. There is no link between outlays and outcomes. Witness how swiftly the UPA gave up that linking exercise. All these theoretical arguments among economists about fruitfully switching expenditure from private investment to public consumption miss the point. The government machinery doesnt have the administrative capacity to deliver public expenditure. Why else did the highway programme become a road to nowhere Before using expressions like pump priming, economists should remember where that analogy came from. From mechanical pumps that were primed not with fuel, but with water. Contrasted with this watery, diffused and intangible public stimulus, we have, however, had a stimulus that is concentrated in a short-burst and is far more efficient. Thats the electoral stimulus, also estimated at 0.6% of GDP. Witness its manifestation in sectors like transportation, vehicle-use, media, advertising, printing, films, PR, liquor, construction of elephant statues and consumption, too, since direct cash transfers are also involved. Economists tie themselves up in knots over the multiplier. Yes, the multiplier works. But it is relevant in recession-like situations, where resources dont have opportunity costs.

India is in downturn, not recession. Therefore, resources have opportunity costs. Hence, the debate about switching expenditure from private investment to public consumption. This misses the black economy angle, estimated in India at anything between 20 to 40% of GDP. This isnt money sitting in Swiss bank accounts, it is money in India. Amnesty and voluntary disclosure of income schemes have rarely unearthed significant amounts of black money. However, we err in thinking the economy is neatly divided into black and white, with the twain never meeting. Black and white is pertinent if one is drinking Scotch. The economy is actually in shades of grey. Black becomes white and white becomes black and involuntary disclosure through electoral stimulus is far more effective than government amnesties. General elections lead to black income delivering multiplier benefits in the white economy. Those resources have limited opportunity costs, outside circular flows within the black economy. Unlike the conventional fiscal stimulus, the electoral stimulus is therefore more effective. To take an example relevant from this evening, horse-trading will ensue. But that will normally restrict flows to within the black economy. Unlike that, the electoral stimulus breaks down black/white boundaries and leads to seamless transfers.

Unfortunately, it is one-shot. Traditional pump priming is also meant to be temporary, until an economy recovers. Nevertheless, is it possible to give some more permanence to the electoral stimulus Sure, we will repeat it 18 months from now. But that might be a quirk of fate. Can one introduce systemic changes so that we are guaranteed electoral stimuli every once in a while After all we need an internal cushion to provide endogenous sources of growth and it is certain the incoming government wont introduce structural reforms. This objective should be spliced with the argument about election 2000 leading to a fractured verdict that contributes to instability. Today, instability is inevitable since neither of two major parties has numbers and regional and incremental parties possess disproportionate clout. Like the economy evolving to 10%-plus growth trajectory, India will eventually become bipolar. There are roughly 54 weeks a year and roughly 540 seats in Lok Sabha. How about moving to an electoral system that is rotational and sequential, with elections to ten seats every week Instead of a concentrated burst, electoral stimulus then becomes small, but steady-state, and instability and horse-trading also become incremental and continuous. We diversify risk.

The author is a noted economist