Will Economy Be ‘Dead in the Long Run’ Without ‘Keynesian’ Ideas?

Without worrying about the remarks of ‘market fundamentalists’, the State must go ahead with massive state spending.

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(Photo: Rhythum Seth/ The Quint)

The COVID-19 global pandemic has become the Number One Public Enemy, and the cost of fighting it is truly mind-boggling. Our past experiences of fighting various diseases of this kind have been to use, with almost little or no success. Amid this, as the lockdown continues in different avatars, the coffers of the state governments are drying up in the absence of any concrete economic activity.

The expenditure, however, continues to grow in the form of medical facilities, allowances etc. Economists, in the meanwhile, are busy calculating the fiscal cost of the lockdown, the extent of job-losses, and the lockdown exit plan – for the economy to restart.

Post-COVID World: What Will Happen to Our Savings, Investments, Jobs?

It is imperative that a concrete plan is devised soon, one that could benefit large sections of people, especially the daily wage earners, rural migrants, middle class and poor. The task is easier said than done, considering the limited options the government has due to the twin balance sheet problem of banks and NBFCs, a large fiscal deficit, the obsession of the MPC (Monetary Policy Committee) for fiscal targeting at any cost, and an acute deficit of demands in the economy.

The question that is troubling many of us right now is: what will happen to our savings, investments and jobs in a post-corona world? Perhaps we should look to history to find solutions.

Govts Have the Power to Change Ills of Capitalism

Although the comparison of two historical junctures isn’t always justified, some parallels can always be drawn. A post-corona world looks somewhat like a post-World War world that was shattered, devastated and fragmented – politically, economically and socially. It was also the time when the world was moving towards ideological bipolarity and witnessing the rise of the USSR, from a primitive agricultural society to an advanced industrial nation. Due to widespread poverty, economic deprivation and unemployment, the conditions were ripe, and there was huge temptation for several European countries to go the Soviet way by adopting the socialist model of economic development. It was in this context that a new avatar of capitalism, in the form of Keynesian economics, was born.

At a time when serious questions were being raised about the future of the market-led development model of capitalism immediately after World War-II, capitalism transformed itself completely through the Keynesian model, whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of the government.

John Maynard Keynes believed that governments have the power to change the ills of capitalism through the judicious injection of money into the economy to generate demands and solve the problem of massive unemployment.

He propounded that the real problem of unemployment was due to lack of demand. For prosperity to return and economic depression to end, the government needs to intervene, even at the cost of large fiscal deficits, he argued. This can be done through the creation of massive infrastructure projects, both social (schools, colleges, hospitals) and capital (highways, dams, steel plants). The situation in India is not very different today from that of Europe after World War-II.

Modi Govt’s Stimulus Package Incorporated Some Keynesian Ideas

The unemployment level in India is still hovering around 24 percent, with no signs of improvement. The poverty level is rising fast and the rural- urban gap is increasing. At present, the private sector does not have either the potential or the intention to fill this gap. In any case it would take a lot more than the initiative of the private sector for the country to get back on track because of the dire and unique socio-economic conditions of our country.

The government has to step in, at least for now.

The concept of a ‘welfare state’ may sound outdated in the neo-liberal era with the so-called Washington-consensus, but at present it is required in India, as a large population cannot survive and grow without the active intervention of the State.

The kind of welfare state India would want to become can be debated, but its core principles cannot be done away with.

It is heartening that the financial stimulus packages announced by the Modi government to offer some relief to the agricultural sector, MSMEs, street vendors, NBFCs, DISCOMs and real estate sector are very much in line with Keynesian economics, as the government has intended to spend more, create more agro-infrastructure, put more money in the hands of the people.

The State Must Go Ahead With Massive Spending & Mass Employment

The government needs to adopt more ideas from Keynesian economics to provide more white collar employment in the public sector like at schools, universities, healthcare, security sectors to the young and educated, in order to create demand in the economy (without thinking much about the escalation of fiscal deficit in the short run), and not letting the demographic dividend go in vain before it is too late – else the prophecy of Keynes that, “In the long run, we are all dead”, will prove to be true.

Without getting worried about the remarks of market fundamentalists or global financial institutions, the State must go ahead with massive state spending and mass state employment at all levels of government.

It would certainly work as a multiplier effect on the economy, and would create huge demand, which would kickstart industrial production and generate revenue for the government eventually.

There are many problems associated with the Keynesian model like who would fund those expenses, crowding-out effect due to government borrowings, and increased debt for the future generations for the present spending, etc. But in the present context, we must give it a shot.

(Pavan Chaurasia is a PhD candidate in School of International Studies (SIS), JNU. This is an opinion piece. The views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)