As we witness one of the biggest global health crises- it has also resulted in a severe economic downturn with limited time to understand and fix. India has indeed taken bold moves to lock the entire country in an effort to control the virus outbreak. There is always a trade-off, containing the spread comes with certain economic costs. But let us be honest and stop talking about Gross Domestic Product and growth. Economic growth is for welfare and a healthy society anyway- the key should be understanding the crisis and economy in a way to tackle it for everyone’s welfare. This blog post will be a genuine attempt to make sense of the current economic crisis specifically in India. Without romanticizing the past theories much, I would seek help from the most important economic thoughts and try to modestly fit it into the current situation.
Before moving into the economic problems faced by India, I want to draw a simple metaphor. Imagine a car being your country’s economy, sometimes there could just be a problem with the headlights, sometimes a flat tyre or sometimes even an engine failure that you have to replace the whole system. The first step is always to diagnose the problems in your car to find out what went wrong. But even before that, we should definitely know what all could possibly go wrong and how to solve it. I can promise to you that this is nowhere closer to how it works in reality because the real-world economy is much more complex. However, comprehending using simple models will help us logically decode the policies and view the problem in a much wider angle. With that note, I want to talk about how different important economic schools of thoughts would respond to the crisis faced in India. For this purpose, I have picked up certain key economists across the political spectrum to offer a much holistic sense of dealing with the economic crisis.
Marxian & Real Business Cycle Theorists
Although I have mentioned Karl Marx- one of the most influential political economists- most of the work will have to be extrapolated to figure in a crisis situation. But all I can say is, Marx would definitely not be happy with the labour laws exemption in a few states. Well, instead of Marx (skipped because I am mostly intimidated) I think it is interesting to talk about the Real-Business-Cycle theorists. The reason I find it appropriate is that- their ideas and theories were mostly formulated based on external shocks and risks. An old traditional economy that was dependent on agriculture is highly vulnerable to face negative growth given external threats like bad weather, poor harvests etc. So the theories were premised on looking at the structural issues that could have caused the crisis. Although the virus is not structural, the Indian economy faces multiple challenges that reduce the resilience to face the crisis. In other words, they would say ‘Sure, COVID-19 was a trigger, but what caused the migrant crisis and unemployment’. It is important to know that Indian economy has certain systemic issues that got further exposed during the lockdown. Irrespective of the status of the lockdown- inefficient system with low demand, high unemployment, falling agricultural productivity and poor allocation of credit are the real problems. So the much-integrated approach of business cycle theorists would make us look back into the policy mistakes done in the past and utilize this time to rectify them in order to revive the economy out of the crisis.
I would be doing injustice to the topic if I fail to mention that this is the most popular and favourite theory to almost every economist. There is a reason Keynes (John Maynard Keynes) apart from his exceptional intellect in the field of economics, had shot up to fame in the 1930s. During the Great Depression, he proposed to redefine the role of government to possess a fair amount of intervention. The government had to intervene during the crisis- departing from the classical school of thought (where they let the markets decide for itself) Keynes actually attempted to imply “you know what, consumers and producers can be irrational”.
Adopting a more realistic framework, the government needs to spend its way out during a crisis even at the cost of having huge public debt. Keynes did not bother about the mounting public debt, he believed the economy would recover subsequently and can manage better . More importantly, demand was the key in his framework of analysis to bring the necessary economic growth. What do we mean by demand here? Alright, in a Keynesian way this is how it would work.
Let us suppose now the Indian economy is stressed, government is the only entity that could stimulate by pumping in more money. When the government provides public investments, cash handouts, direct benefit transfers, tax cuts and interest rate cuts by RBI (broadly as fiscal and monetary policy) then it simply means people have more money in their pockets. When most of the people in the country are left with extra money they would start spending on things which means more business and service units would crop up. The business sector will employ more people and thereby create more income and the cycle goes on. A simple investment made by the government on building a road could actually create a ripple effect on employment and income and hence bring the economy back on track. To posit his ideas to the current crisis, he would prefer the government to spend as much as they can on people right now to bring the demand back.
But I am afraid that this idea could actually change in the current scenario given the fact that even if people had money, the supply is limited due to lockdown – Therefore the extra money might not actually stimulate as we expect. But all we can say is Keynes would have been happy if more demand-side measures were taken to pull the aggregate demand. Policies need to facilitate demand stimulation with necessary monetary policies that would increase the output eventually. Looking at the reforms taken by the Indian government, I do not think Keynes would be completely on board because he would prefer an immediate stimulation instead of reforms that would take much time to materialize. All the infrastructure and public investment projects will obviously take some years to actually happen while the demand-side measures are substantially less. So clearly, Keynes would ask for cash handouts and ‘helicopter money’ along with immediate public investment that can infuse money in the economy.
Monetarists: Milton Friedman
The next economic thought group is the University of Chicago, monetarists-Milton Friedman. Although monetarists are criticized for having incomplete theories, their ideas are very relevant in the context of the central bank. They prefer to have much less government intervention. In simple words, monetarists will not like RBI changing the interest rates. Their argument is related to how high inflation and low inflation is largely due to the artificial changes made by the Central Bank of a country. Just to elaborate a little more on the concept of inflation, it means general price level. When the RBI cuts the interest rates it simply means banks have more money to lend to people and they invest on additional things (which might not be of worth too) that would increase the general price levels.
Eventually, the price bubble would burst and clearly people are left with low-value assets and investments. Basically investing in something that is not worth it but still invests because you have excess money due to the RBI cutting the rates. Vice versa would happen in case of low inflation but the key take away is monetarists want some stability in the money supply. In the current context, Friedman with his adorable smile would probably say no to so many rate cuts by the Reserve Bank. Right now as a monetary policy measure, various interest rates have been slashed that most of the economic package announced is just from RBI. How can this be a problem according to monetarists? High Inflation!
An artificial interest rate cut might not cure the economy but actually invite more problems. High inflation with low employment is a trap that no one wants to get into. However, monetarist theories were incomplete and free-market monetarists evolved to offer more explanation on why an economy needs limited control from the government.
Austrian School of Economics
The final one being the Austrian school of economics celebrated Laissez-Faire (no government intervention). Although the core idea might not be suitable for a crisis situation, I still think the economic thought is worth entertaining. If not to the whole economy, parts of the policies can be framed using the individual rights and free market economy which I also think counters the state entirely taking control using the crisis situation and warrants private property and individual rights to the business sector. One of the prominent Nobel laureate economists, Hayek (he is not in the picture though) propounded for individual rights. Current pandemic has clearly disrupted small scale businesses and enterprises. Taking the extreme position of letting the business sector hold private property and compete during the crisis which would decide who makes the profit. It is more or less a zero-sum game (someone wins at the cost of others). But is it worth doing given that most of the population is dependent on self-employment and is it logical to consider that there would be no market failure?
Unlike the Austrian school of thought, the COVID-19 has imposed many complex problems. Although privatization is happening in key areas, it is unsure if that is to encourage free-market interaction or just the government realizing its own inefficiency in the system. Privatization of industries comes with a huge burden if the regulatory framework lacks effective implementation. The exploitation of working-class, excessive profit, tax evasion, financial manipulation etc are the past outcomes. However, in theory, privatization could be a standard reform to encourage better business in the future.
Having discussed these important economic ideas, it is worth recalling the car metaphor. It is pointless to fix the headlights when the engine has a problem but does not mean fixing headlights are wrong. Similarly, now we have an engine problem and these theories are like parts of the puzzle that offer different types of solutions. No particular theory is promoted, in fact, there are many theories and ideas that exist.
Therefore It is important to diagnose the problem correctly to prescribe appropriate solutions. At the end of the day, we all want to achieve welfare and a better living standard for all. Moving beyond a simple GDP talk, the discussion on the stimulus should be directed to understand the system ruling the economy.
It was a great pleasure for me to write this post and I hope I have done some justice to explain the ideas of great intellects. I might have not covered all aspects of their school of thought but picked the core idea and took the liberty to fix it in the current context. But I must reiterate what Keynes said: “In the long run we are all dead”– a balanced intersection of both economics and philosophy.