The IMF has also done it. Trying to frighten us with the spectre of the Great Depression. The International Monetary Fund’s prediction that the coronavirus pandemic will cause the world economy to suffer its worst recession since the Great Depression raises a question for India. Will Prime Minister Narendra Modi give in to the political temptation to be India’s Franklin D. Roosevelt and unleash massive government spending and a 21st-century version of the New Deal?
The coronavirus lockdowns have grounded economies and are likely to precipitate what Fareed Zakaria called “a series of cascading crisis” and “economic paralysis”.
The IMF’s statement also said emerging markets are at high risk.
Also Read: India lost more jobs due to coronavirus lockdown than US did during Depression
In search of a Roosevelt
Over 17 million Americans have filed for unemployment benefits. India’s unemployment rate in the last week of March and first week of April crossed 23 per cent, up from 7.1 per cent in January, according to the Centre for Monitoring Indian Economy (CMIE).
As more people make comparisons to the Great Depression era, there is now a considerable Roosevelt nostalgia building up too. People are urging policymakers to “learn from President Franklin D. Roosevelt’s response to the Great Depression.”
Between 1933 and 1939, Roosevelt presided over the largest bout of government assistance — unleashing the New Deal, which included heavy focus on public works projects to put money in people’s hands. The government became the largest employer in the United States, and even built some lasting assets like the Tennessee Valley Authority.
Will a similar new New Deal to fight the corona-infected economy be Modi’s new masterstroke?
Also Read: India’s elite Socialism, Scindia’s non-AC Range Rover & the low income country trap
Great Depression, a modern metaphor
In India, Modi has in the past six years demonstrated that he believes in ‘maximum government’ and socio-populism. Will the economic troubles bring out a Narendra Roosevelt Modi who will build cities and highways?
The Great Depression is often mentioned today more as a metaphor than as a factually accurate reference. Even the 2008 financial crisis was compared to the Great Depression by many. It wasn’t true then. Though it took the US and European economies over a decade to rebound, many economies like China recovered sooner. And stocks and other markets across the world recovered faster, within a year.
The IMF’s latest usage of that metaphor apart, already enough people are declaring that all talk of fiscal conservatism is now dead because of the coronavirus pandemic. Even the US government’s $2 trillion coronavirus relief stimulus is not enough, they say. Aggressively spend, spend, spend seems to be the mantra.
Also read: How will you restart the economy? There is no perfect answer
It’s not the 1930s
But Roosevelt’s Keynesian largesse – building large stadiums, schools and parks – is unlikely to make a difference in the new economic order of the 21st century. This is an era when private investment has a crucial role to play, along with public investment.
Also, economies today cannot be controlled or nudged by governments like Roosevelt probably could back in the 1930s. There are bigger players than just the government that are involved today.
For example, the market cap of Exxon, one of the largest publicly traded companies, is larger than the GDPs of some nations. Hedge funds can invest and move trillions of dollars every day. So the chances for a government and central bank to pull an economy out of deep, paralytic slowdown are limited today.
In a world of interconnected economies, something as ephemeral as sentiment can hold more sway than government stimulus packages.
In fact, stability of policy and a government resolve can go a long way in boosting sentiment. But under Modi, there is always a fear of a new disruption around the corner masquerading as a ‘masterstroke’.
Also read: Three reasons why Modi took the path of social reform instead of economic reform
Modi’s fiscal options
But the big question is: where will the money come from? Will Modi continue with the grand Central Vista and project it as job creation for the poor?
Will he pull a rabbit out of the hat and raise funds through dollar bonds, NRI bonds, end all remaining restrictions on foreign investors, tap sovereign funds of wealthy nations like those in the Middle East, ask Indians to give gold or get RBI to print more money (and risk more inflation)? Roosevelt ended prohibition. With The Economy Act, he cut the pay of those who worked for the government and military by 15 per cent. He set up a mechanism that set up lending systems to bring private capital into publicly funded projects — like India’s own PPP.
Also read: NRC to GST – How Modi & Amit Shah create Anxiety Raj and still win elections
Choice between politics and economy
There is now a wide consensus that the Modi government has mostly been about politics and winning elections and has shown comparatively less regard for the economy. It has managed to decouple election victories from economic performance.
And that’s where Modi can take a leaf out of the Roosevelt book.
Even though the New Deal lifted elderly people out of poverty and put in place the social security programme, there are many scholars like Jim Powell who have said that it hurt the economy more in his 2003 book FDR’s Folly: How Roosevelt and His New Deal Prolonged the Depression.
But the New Deal politics helped Roosevelt politically. He was elected four times. In fact, his adviser Harry Hopkins had famously said: “We will spend and spend, tax and tax, elect and elect.”
Because of this, even the American constitution had to be amended to limit a president to two terms.
The political benefits is why there is a real risk that Roosevelt can become an obvious template for maximalist Modi. Will a new New Deal to fight the corona-infected economy be Modi’s new masterstroke?
Views are personal.
Every threat is also an opportunity. India has a major major infrastructure gap which only the Government can cover. This opportunity can be used to build / reclaim water bodies, sewage treatment plants, drainage, communication networks and other such public infrastructure. The Central Vista can wait. In so doing the steel, power, cement and construction industries will get a demand thus creating investment and growth opportunities for the private sector.
The creaking judiciary, law and order and the police department need to be adequately increased and technically supported for ensuring quick justice delivery.
Yes foreign manufacturers should be allowed to invest in new units as long as they are foreign exchange neutral or positive. This will help in enabling India to capture a portion of the supply chain being shifted out of China.
One can go on but the basic idea that is being suggested is that the Govt focuses on infrastructure and enabling private sector both Indian and foreign to build on top. Thus creating jobs, demand and the economy while making India green, clean and equitable.
I don’t know if this article is a satire or whatever is the word for it. This government hasn’t been paying up even its legitimate dues even in pre-corona days. Or so one reads in the newspapers. Infrastructure projects claimed they had payments pending, then I read somewhere that the Food Corporation of India is waiting for a paltry amount of one lakh seventy six thousand crores. States are waiting for GST payments from the centre. Many government employees like those of BSNL and thousands of teachers are waiting for their salaries. Then Shaktikanta Das has already opened up the purse strings of the RBI and no one knows for what purpose that one lakh crore has been used…Urjit Patel has given up on money control long ago and is now writing articles on Corona control. What Roosevelt-like spending are we talking about? BJP leaders only know how to spend money for a new jacket every day.
Anyone who says he can read Modi’s mind is either a liar (most likely) or an avatar of Einstein. Shekhar Gupta in PRINT
There’s an electronic machine called a “Random Word Generator”. Even it doesn’t know what word it is going to generate next.
It is the ever wise Dr Singh – who has forgotten more economics than the rest of us will learn in our lifetimes – who said that India cannot spend its way out of poverty. At a daily per capita income of $ 6 – ignoring vast inequalities, how much the rich nibble away from this small piece of cheese – there is simply not enough for the government to cut a New Deal with the Indian people. The fiscal envelope has been pushed as far out as it will go. When people talk of running the printing presses, it is time for sensible people to get really worried. 2. There is no magician who can double farmers’ incomes in five years. Or conjure up a GDP of $ 5 trillion out of thin air. That is also not what the electorate expects from any government it elects to power. However, the shambolic state of the Indian economy when Covid 19 struck has no reasonable justification. At least after a forgettable first term, the second term should have been dedicated to restoring the economy to health and higher growth. Instead, consider what that pool of replenished political capital has been expended on. Aur toh hum kya keh sakte hain.
Dear Rama Laxmi;
Many thanks for sharing a original thought, that has the possibility of turning into a reality. However, a maximalist Modi is unlikely to have the band width to deliver a new deal as FDR did a century ago. The BJP does not have thinkers or leaders who have the ability to stand up to Modi and follow an agenda that would provide salvation to the Indian people despite criticism. Only chance I see is if someone like Subramaniam Swamy was given this assignment to renovate the economy; perhaps ther could be some hope then.
Regards
Rajendra P Ghogale
A different article on ideas and not worthless criticism.
In the present times we need more such writings.
Covid infected indian economy will produce an Indian Karl Marx, shamelessly.