Addressing the annual session of the Confederation of Indian Industries (CII) on June 2 via video conferencing, India’s Prime Minister (PM) Narendra Modi spoke of getting growth back. He emphatically stated that “We will get our growth back” once Unlock 1.0 commenced and greater relaxations kicked in.
It seems he had in mind a V-shaped economy, ie, a quick recovery. He explained that his confidence was based on his trust in the capabilities and intellect of India and the fact that the reforms undertaken recently by his government were systemic.
At a time of national dejection, if not despair, the words of a leader have a role in instilling self-belief in the population. But unless they are accompanied by concrete action, they will not amount to much.
The sparkling speeches of Winston Churchill may have encouraged his people when Britain embroiled itself in what became World War II. But they were unlikely to have sufficed had the United States not intervened.
Presumably, the analogy will not be lost on the PM as he uses the metaphor of war when characterising the necessary response to COVID-19. In this context, it is his government that would be expected to act, not the industrialists to whom he had exhorted to do so in his address. One can state that the private sector cannot do much on its own to get growth back.
To appreciate why the government is central, it needs to be understood that in an economy with excess capacity, income is determined by the expenditure on goods or “aggregate demand”. When an economy has been shocked into a lower level of activity, it could well remain there, unless aggregate demand revives.
For aggregate demand to revive, there has to be investment. To understand this, think of demand as having two parts, namely consumption and investment. Consumption is largely determined by income and cannot rise unless the latter does so first. Right now, in India, income is depressed because of the economic shock.
On the other hand, investment is not constrained by income and can be fuelled by credit. With greater investment, aggregate demand rises and, so does production or income. But private investment, although based on expectation of the future, is at least partly driven by its current state.
So, with output depressed by a 68-day-long lockdown, private investment, and thus growth, could be held back even after the lockdown is lifted. The PM is optimistic when he expresses confidence we will get our growth back. Fortunately, economic reasoning shows a way out of the present situation.
The government should raise aggregate demand, preferably through investment, to take the economy back to where it was in late March.The PM spoke of the growth potential of the reforms implemented by his government, especially in agriculture.
These are needed and significant but they are aimed at the supply side of the economy while the problem today is a demand shortfall. We see this all around us – when shopkeepers in Mumbai speak of how their daily sales are, on average, a quarter of what they were before the lockdown, and when migrant workers, having reached their homes speak of returning to Chennai in search of work. So, a shortage of demand for goods and labour is what is at stake,and a stimulus alone cannot address it.
Pulapre Balakrishnan is professor of Ashoka University, Sonipat. The views expressed are personal. First published in HINDUSTAN TIMES