Old-school magic

An unnecessary controversy is being created about India's 'untenable' fiscal deficit for the financial year 2017-18 as it reached 96.1 per cent of the budget estimate towards October end, lifted by an increase in expenditure. Similarly, the growing criticism by certain interest groups about large non-performing assets (NPAs) with the majority of state-controlled banks would appear to be unwarranted, if not uncalled for, given the developing status of India's economy and the importance of most of the defaulters' stalled projects. First, there is nothing wrong in the government's large budget deficits, if it is meant for supporting basic industrial projects, housing and infrastructure, creating a large number of jobs, raising income and demands. That will also induce profit-oriented private sector firms to invest, progress and, in the process, further grow the economy. It is time that India, once again, starts flirting with the widely repudiated theory of Keynesian economics. Developing China's emergence as the world's second-largest economy owes a lot to both large deficit financing by the state between the mid-1970s and 1990s and, once again, in 2008 and 2009, to expand infrastructure, core industries and defense manufacturing. China also controlled the exchange rate of Yuan to subsidise export production to earn precious foreign exchange and enhance local employment. China's commercial banks mostly maintained a very high level of NPAs — much higher than what India witnessed in the recent years. China's policymakers were not concerned.

China's post-Mao communist leadership had selectively used the Keynesian economic theory to its great advantage, although it took over 20 years for John Maynard Keynes's "General Theory" to be translated into Chinese. It was first published in China in 1957, around the time of Mao Tse Tung's "anti-rightist" campaign. Mao started his famous agrarian revolution to unite millions of farmhands to promote communism in China. Uniting industrial workers and state promotion of large industries came later. In 1950, China, now the world's largest steelmaker, produced even less steel than India. Post-Mao, Chinese leaders selectively followed Keynesian economics for rapid industrial growth. Hu Jintao and Wen Jiabao embraced Keynesian economic prescriptions with great determination. In 2008, they handled the country's financial crisis by approving a large stimulus package and spurred the country's banks to lend.

In Japan, most large commercial banks too maintained high rates of NPAs during its fastest growth years between the 1970s and 1990s. How many Indians today remember Japan's Dai-Ichi Kangyo, the world's largest bank during the latter part of the 20th century? It was created in 1971 by a consortium of Dai-Ichi, Japan's oldest bank, and Nippon Kangyo Bank, a state financial institution that granted long-term loans to industry and agriculture. The bank served its purpose for several years before it sulked under high NPAs. It had to be merged with Fuji Bank and the Industrial Bank of Japan to form the Mizuho Financial Group in 2000, without creating any panic among its depositors and creditors. It was restructured again, the very next year.

India's initial 'socialistic pattern' of economy built in the 1960s and1970s were substantially designed on Keynesian prescriptions of deficit financing and job creation. The government created a large public sector to provide a big industrial boost for growth of the private and co-operative sectors since the1980s. India's private sector business did not have enough money to invest big in the core and infrastructure sectors. Family-run commercial banks were nationalised to support the government and private investments, expand branch network and create jobs for growth.

However, the government focus radically changed since 1991, after a foreign debt crisis and half-hearted World Bank-IMF guided economic reform that slowly conceded the industrial turf to foreign direct investment, according to the overseas investors' choice. Keynes was quickly forgotten. The focus shifted to deficit control, market forces, large trade imbalance, foreign borrowing and the floating Rupee. For long, India's private sector entrepreneurs have been drawing excess funds from the nationalised banks for their projects by inflating the project costs and colluding with banks. Excess funds were mostly diverted by those entrepreneurs to float another company or support other projects. Inflated project cost led to high production cost. Some turned NRIs to run away from the country with such funds, running their India business comfortably from outside. It would be wrong to assume that a developing economy such as India, should at this point of time, strictly follow the patterns of highly developed economies in Europe and North America on deficit management practices and commercial bank asset quality norms.

India's anemic private sector and signs of fatigue in the property market point to the increasing needs of the government to provide additional stimulus to swell the economic growth target to 7.8 per cent in 2018-19 and 8.5 to 9 per cent in the next two years. Investments in roadways, railways, inland waterways, mass housing, rural digital connectivity and defence manufacturing should drive this growth. The government should not worry about budget deficits for such a purpose. Banks must play their part to boost overall domestic spending through credit expansion, the hallmark of Keynesian policies. Massive job cuts in the private sector will have to be more than matched by creation of new jobs through public spending in new projects. If necessary, the Rupee may have to be devalued to encourage exports and compress imports. The policy will strongly support the government's 'Make-in-India' programme. In 1935, John Maynard Keynes wrote to George Bernard Shaw: "I believe myself to be writing a book on economic theory which will largely revolutionise – not, I suppose, at once but in the course of the next ten years – the way the world thinks about its economic problems." And, true to his words, Keynes' magnum opus — The General Theory of Employment, Interest and Money — published in February 1936, transformed economics and economic policymaking around the world. Eighty-two years on, the Keynesian theory still holds up in developing economies, including India.