Anilesh S Mahajan, Associate Editor, Business Today
It is a rare occasion in Parliament when former PM Manmohan Singh rises to be part of a debate. He did that today, to criticise the government's implementation of the demonetisation drive. And in order to demolish the treasury benches' arguments of the drive benefiting the county in the long run, he quoted a half quote of British economist John Maynard Keynes: "In the long run we all are dead."
Sorry, Mr Singh, we were dead in the short run, flat three years. He perhaps quoted Keynes out of context during the debate. Ironically, India requires demonetisation because Singh as PM failed to implement the Keynes theory. And neither could he control the side-effects of corruption, nepotism and misuse of public spending.
In 2008, amid global recession, to spur growth in India, Singh chose to push the banks - largely public sector banks - to lend in the critical five sectors of civil aviation, power, road, steel, and urban infrastructure. By 2011, we all saw these sectors go bust. The much-hyped UMPPs and investments in power generation went bust, the airlines and corporate investing in civil aviation saw no future, road sector investors almost went bankrupt, and their investments went kaput. This also led to nepotism, corruption and misuse of public money. The consequence was generation of black money and NPAs for the banks.
The British economist used this quote, in his book - A Tract on Monetary Reform - to criticise the then British government's measures to deal with the Great Depression and advocated more public spending to spur demand. All his life, Keynes believed that fiscal deficits in government budgets are not bad. He argued that government borrowing of one kind or another is nature's remedy, so to speak, for preventing business losses from being in so severe a slump as the present one (Great Depression), so great as to bring production altogether to a standstill. And this may not lead to inflation.
Singh saw merits in the theory to bring the world out of recession. And famously at the 2008 G20 summit in Washington, where he advocated Keynes' stimulus to the world to come out of the great recession. Back home, he pushed the public banks to lend in the five critical sectors. Extending the same thought, he also paved way for schemes like MGNREGA, right to food, etc.
But the irony of Keynes' thought is that it saw success only in bringing the western world's economies out of the tremor of World War II, never afterwards. Incidentally, many of the mixed economies followed the principles initially to move out of public sectors, and have faced similar challenges of 'side-effects'. This includes China, Russia, among others. The test of the leadership remains in checking the side-effects. But in India, things went out of control because of the inefficient political leadership. In 1977, British disowned the theory and moved away, despite the era being known as the golden age of capitalism, but the side effects were becoming too big to handle.
So it is for India in 2016. In 2014, by the time Singh demitted office, all these five sectors were bust, and many of the projects in these sectors turned NPAs for the banks, largely public sector banks, bleeding the balance sheets of corporate houses. This started happening during Singh's tenure. In September 2009, the NPA numbers were Rs 66,686 crore, which rose to Rs 2,40,947 crore by the time he left office, and the snowball effect is only worsening the numbers.
Globally, too, the Keynes stimuli have not worked, neither in the US nor in Europe. But what it led to is some respite in the short term, and in the longer term, inflation, 'artificial' profit booking, creation of black economy and de-growth in job creation.
Incidentally, the present Finance Minister, Arun Jaitley, refused to adopt Keynes's way fully. In his past three budgets, he continued to increase public spending in the infrastructure, but he is not keen on increasing the public debt. In fact, in 2015, the Fiscal Responsibility and Budget Management Act was amended to allow the financially well-performing states to increase the deficit. Evoking Keynes in certain circumstances is fine, but for sure he is not a solution for all our economic woes. Hope Mr. Singh understands this quickly. Better still if the principal opposition Congress does so before him.