A neural network for development: How MPs can help restart economic activity

Published: June 23, 2020 7:01 AM

MPs can help restart economic activity by going to their constituencies and working towards reviving industry and other supply-side responses.

But on the fiscal policy side, pumping money into MGNREGA-type schemes is like an intravenous injection.But on the fiscal policy side, pumping money into MGNREGA-type schemes is like an intravenous injection.

By Vishwapati Trivedi

Let me briefly introduce the problem at hand. We are a nation of 1.3 billion people. We have just gone through a long complete lockdown, and continue to deal with restrictions. The economy needs revving up. The government of India has taken several measures to restart economic activity. The intent is to bring back both the demand-side and the supply-side responses. While the reduction in the repo rate or bank rate brings relief to those who use the bank capital, mostly industries and traders, and is all in the formal sector, it must be admitted that in India the front-loaded monetary policy that reduced the policy rate has not triggered much investment response, conforming that we have a weak monetary policy transmission mechanism.

But on the fiscal policy side, pumping money into MGNREGA-type schemes is like an intravenous injection. It’s also unfortunately akin to the Keynesian concept of digging the holes and filling them up. But it puts money in the hands of the rural community, which is a large part of the overall demand. Such a policy has a high expenditure multiplier, besides it also generates a sense of well-being as it creates employment. This large-scale government expenditure necessitates ‘borrowing’ from RBI, which actually is nothing but printing of money. In my opinion, using it for demand generation in a post-lockdown period is appropriate. In several policy prescriptions such as those of Krugman and Okun, this ‘stimulus arithmetic’ works. The multiplier between changes in real GDP and changes in the unemployment rate according to the Okun’s law is 2—it means that if you have to raise real GDP by 2%, the unemployment rate should be reduced by 1 percentage point.

The difficult issue is to generate a supply response. Banks have to take the risk and allow liberal enhancement of limits, no-questions-asked moratoriums, and must go for index-triggered approvals that are not associated with any subjectivity and hence won’t put bankers to individual-level risks. The MSME sector needs to open up. If this is not done in the same time-frame as the demand response, we may see inflation. Once inflation leads to inflationary expectations on a large scale, hell will break loose. The self-fulfilling hyperinflation will be the worst outcome. Compare it to what happened in the 1930s and later in several South American countries.

So, what can be done to catalyse the supply-side response in tandem with the demand-side push?
I don’t want to supplement the large body of thinking and policy instruments already available with the Ministry of Finance. I want to propose to fill-in a gaping hole in the connect between the government, the Party and its most powerful arm, the Members of Parliament. This is the neural network of the government.

Of the 543 elected members of the Lok Sabha, 274 belong to the BJP constituting over 50% of total strength. Then there are NDA partners, taking the strength to 349. Then there are Rajya Sabha members. It is a great opportunity to use this political workforce to go to their constituencies and work towards reviving industries and other supply-side responses. The Members of Parliament should be directed by their Party high command to revive industries to the level corresponding to last year. The issues of MGNREGA, unemployment, farm produce procurement, agricultural produce, harvesting, storing, transportation must be overseen by the local MP, as a special effort, not in the course of business-as-usual. He/she must report in a laid-down format and his/her performance should be measured/rated.

They should also effectively oversee that MGNREGA is executed properly. Reports from rural areas confirm that disbursement and utilisation of funds under MGNREGA is faster than ever before. MPs should be asked to report progress to a senior functionary in the Party, and the Party should measure this performance through a special cell. This will not only ensure that a large amount of money does not get into the pockets of gram pradhans, but also that a large number of beneficiaries get the money in their hands and make an impact on aggregate demand. From my field experience, I know that the highest potential for misutilisation is in the ‘earth works’ and that too before the monsoon (and 80% of MGNREGA work is earth work). The leakage must be stopped. The idea is to spread the monetary impact of MGNREGA-type schemes as thin as possible. The marginal propensity to spend of individuals is also subject to diminishing returns. Hence, a larger number of beneficiaries will generate a bigger absolute demand, than if money is concentrated into the pockets of a few local politicians and junior officials. An observant and a vigilant MP can do much more than timid officials.

Secondly, due to extreme structural deficiencies of the Indian economy, a supply response is not likely to get sufficient traction. It is evident that the two crucial inputs of output—capital and labour—are separately located in Indian geography. This became evident when we faced the issue of migrant labourers. This is where the structural gap needs to be filled up, and fast. MPs must be made to look after the issues of supply of labour and demand for labour. MPs of surplus areas in Bihar and UP must be willing to lead the charge in encouraging local labourers to go to places where the demand is, such as Tamil Nadu, Maharashtra, Kerala, etc. Only they can do this; no bureaucratic machine will deliver on this front if tasked to. The government, in the meantime, should come out with a migrant-labour-focused scheme to iron out the structural distortion of the Indian economy. We have learned during the pandemic that there is no safety net for migrant labourers, either for protection of wages or for habitation.

The Party must convey a message to its MPs that Covid-19 has damaged the economy temporarily as the government’s strong response has contained it, but if there is hyperinflation, even the government cannot do much. The idea is to bring the economy on line first, and for this the work cannot be completely left to bureaucrats and officials (big or small), instead politicians, especially incumbent MPs, must lead the charge; Cabinet ministers can choose a Rajya Sabha member for their constituencies. The government can make this initiative even more effective if it measures the performance of each MP, which, in turn, could determine his/her eligibility for a ticket next time.

The author, an IAS, is former secretary to the Government of India

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