Wheels of justice
As I read the report, “35 years on, 11 policemen convicted of royal’s killing” (Page 1, July 22), I was left confused — on whether to rejoice or deplore the verdict or the situation. In India, many cases are getting prolonged and unduly delayed in courts for years and years. As a result, those guilty, including those in authority who are vested in devising and implementing policy decisions, go scot free. The damage they cause cannot be undone even if the judiciary pronounces a verdict. Judicial reformation is the urgent need of the hour. Time-bound trials depending upon the gravity of the crime and filling judicial vacancies are some steps that are needed.
M.B. Madhusudanan,
Chennai
Countering China
As a rising Asian power, India should be more assertive in its dealings with China. It was Mao who said “political power grows out of the barrel of a gun” and China respects power, be it economic, military or technology. It is interesting that the writer (Editorial page, “The main planks in a counter-China policy”, July 22) suggests recognising the relevance of the Dalai Lama. Surprisingly, India has gone neutral on the Dalai Lama and should now harness the global goodwill that the spiritual leader commands. He could play a role in our soft diplomacy in highlighting Chinese aggression. If China does not hesitate to use its “wolf-warrior” diplomacy, India should shed its timid outlook, which till now has reinforced Beijing’s view that India can be coerced to accept its point of view.
H.N. Ramakrishna,
Bengaluru
This is the right time for India to send a strong signal to the world that it is committed to its policy of peaceful co-existence. All options for peaceful negotiations must be exhausted before the authorisation of the drastic step of military intervention. In this case, the government’s decision to show restraint in the wake of the brutal and barbaric Galwan Valley’s clashes should be appreciated. In India, the political Opposition should shed its constant criticism of the government especially for pursuing a policy of negotiations over the use of force.
R. Thiagarajan,
Chennai
I am disheartened, as a retired major general, by the former NSA suggesting the use of “subtler tools” of power by India. China defeated us comprehensively in 1962 and has now heaped ignominy on us. As common military logic dictates, based on the terrain, force levels and equipment profile in the areas concerned, most of the actions will be at a tactical level and with very little scope for manoeuvre by mechanised forces. Therefore, the stress will be on attrition warfare, making full use of Surveillance and Target Acquisition (SATA) and fire power resources available to the Indian Army and the Indian Air Force.
Jatinder Singh,
Chandigarh
Reviving the economy
“You’ve got to be very careful if you don’t know where you are going because you might not get there,” said Yogi Berra. The Indian economy was in a grim state before the impact of COVID-19, with dismal GDP growth of 4.2% for the year 2019-2020. Other economic indicators such as unemployment, corporate debts, stability of banks, and corporate profits, were also depressing. Then came the big blow to the economy from the COVID-19 pandemic, which was akin to adding fuel to the fire. The economic impact of COVID-19 was unprecedented due to on account of the more than two months of a complete lockdown and full economic disruption. All of a sudden the economy plunged into a crisis. The economy started shrinking and the unemployment rate soared to 29%. Global institutions projected that the Indian economy would shrink by 5-7% for the fiscal year 2020-21 against the projected growth of 6.5% in the budget. Needless to say, the country has never faced an economic crisis of this magnitude. At this juncture, it is a daunting task for the Central government and the Reserve Bank of India (RBI) to pull the economy out of morass. Unfortunately, the actions taken so far by the government are inadequate; it should immediately change the way it is dealing with the worst economic crisis in recent history. If it does not act more boldly, with decisive actions, the economy may plunge into a depression.
How bad is the economy now? The reported unemployment rate for May end was 24%, the highest ever reported against the rate of 5% under good economic times. As per an RBI survey, consumer confidence collapsed totally in May 2020 and is going to remain pessimistic for the next 12 months. In the same survey, consumer perception on the general economic situation, employment scenario and house hold income had plunged into a contraction zone. The economic impact of the migrant labour exodus is yet to be figured. Sectors such as hospitality, airlines, and transportation are seriously affected and it would take many months for an economic revival. The construction sector, which employs the second highest numbers of labourers is seriously affected. Though economic activities are said to be getting back to normal after the lifting of the lockdown, the increase in number of COVID-19 cases every day and associated deaths are causing fear and, consequently, impeding economic activities.
There are lessons learned from economic history. One of the three main reasons for the Great Depression of 1930 in the U.S. was the government spending cut (austerity) by then U.S. President Herbert Hoover in the face of an economic slump in 1929. The economy which remained in depression throughout 1930-40 started its recovery when the government started massive spending for the World War II in 1940. Unemployment dropped to 2% in 1943 from 15% in 1940, when the economy reached its full capacity due to the spending.
In the Global Financial Crisis of 2008, the United States went ahead with more government spending, which was opposite to the austerity measures prescribed by the International Monetary Fund and other global economic bodies. At the same time many Euro nations such as Greece and Spain went with the austerity due to financial compulsions. The economic recovery for those countries was very painful and devastating.
Recently, to fight the economic crisis due to the COVID-19, the U.S. government. approved a $2.4 trillion (about 10% of GDP)-worth stimulus plan. The U.S. decided to play big to fight the crisis, which is worst since the Great Depression. With this spending, the U.S. debt level is going increase to 120% from the current 105%.
Microeconomics was born in 1940 as an intellectual response to the Great Depression. There are broadly two school of thoughts, Classical and Keynes theories. As per the Classical theory, the supply side will take care of demands and short-term economic fluctuations can be ignored as the economy will self-correct itself over time. It lays emphasis on the long run effect of monetary policies on aggregate price level, based on the assumption that prices and wages are flexible.
The Keynes theory is based on the assumption that prices and wages are sticky. As per Keynes, the ‘total income in the short run is determined by the spending of households, business and government’. Keynes believed that the problem during recession and depression is inadequate spending. The less ‘people want to spend, the less goods and services firms can sell. If firms sell less, then they will only produce less’. Accordingly, they will hire only less number of people. Overall the economy will be depressed due to lack of aggregate spending. In this case the economy will not be self-correcting and will require external factors such as government spending. Keynes’s dictum is boom not slump is the time for austerity.
History has proved that classical theory is not effective to deal with serious economic slumps, which require external intervention such as government spending. To save the economy from the current crisis, embracing Keynes is the only way forward.
Why have the measures taken by the government been inadequate? Immediately after COVID-19 hit the economy, both the RBI and the Government came up with many measures to stop the economic slump and reverse its direction. On the monetary side, the RBI made cheap credits available to banks by the usual reduction of key rates including the lending rate. It is noteworthy that the RBI only expanded the monetary base, the money in circulation and reserve money with banks. Unfortunately, in the current economic crisis, increasing the money supply will not generate the required employment. The reason is the cheap money will not make businesses to do any meaningful capital investment when the confidence level is very low. The lower interest rate is not low enough to induce sufficient spending to restore full employment and business confidence.
On the fiscal side, the actual stimulus plan announced by the government is less than 2% of GDP against the much trumpeted original 10%. This is totally inadequate to reverse the current slump, with 24% unemployment and negative growth rate of 5-7% for this fiscal year. On top of it came the austerity measure instructed on June 6, 2020 by the Ministry of Finance to suspend major government schemes this year. Lessons from history are that austerity would harm a much depressed economy more than it being a cure. Serious diseases require good and strong medicines. It is high time for the government to fully embrace Keynesian economics and go in for big spending.
Why should the government embrace Keynes Economics and spend more? As per Keynes’s, the ‘aggregate demand is responsible for low income and high unemployment that characterise the economic slump’. GDP = Aggregate demand = total output = Consumption C + Private Investment I+Govt. Spending G+ export X – import M (Except Government spending G, the rest are private spending)
Consumer spending is mainly affected by income, wealth, psychological factors and expectation of future income. When the economy is depressed, people and firms spend less. As one person’s spending is another person’s income, one person’s income is another person’s spending. So the lack of spending depresses the economy with higher unemployment, leaving household and firms worse off.
As per Keynes, as long as the economy got unused capacity, increased spending causes firms to raise production and hire more workers. Therefore, cutting taxes or raising government spending or both give a much-needed boost to the economy. Keynes theory is based on the notion that unemployment rises when total aggregate demand in the economy falls short of the economy’s ability to supply goods and services. If aggregate demand is inadequate, the goods/services are hard to sell and jobs are hard to find. It is the duty of the government to stimulate the aggregate demand when it is weak and restrain the same when it is too strong.
When the government takes up a new project, the money laid out for wages, materials and the like does not stop there due to its multiplier effect in the economy. Increase in ‘household income leads to a rise in consumer spending which in turn increases firms output yet again. This generates another rise in disposable income which leads to another round of spending and so on’. When it rains in consumer spending, it pours in the economy. There are many “ready to shovel” projects/schemes with the government that can be started immediately.
What should the government do now? Based on early indications, economic recovery is, most probably, going to be very painful and prolonged if the government continues with its fiscal conservative approach, not borrowing and spending more. There is a possibility that the economy may slide further and plunge into a full blown depression, which will have a devastating impact on life and the country. If the current crisis is prolonged, many debts ridden corporates will go bankrupt. That will have a knock-on effect on financial institutions which are already under stress due to the problems of non-performing assets. Definitely this option does not make any overall economic sense.
Given the magnitude of the economic crisis, the government should fully embrace Keynes and announce the balance stimulus of 8%. This goes without saying that strong medicine will have side-effects. The stimulus will increase the government debt level to approximately 80% of GDP due to borrowing. Increased debt will pose a potential threat of downgrading by rating agencies. The usual concern of government borrowing competes with private sector investment, crowding effect.
A debt level of 80% is manageable as long as the economy grows as fast as possible, so that the debt will be smaller over the time. Due to government borrowing in a depressed economy, there will not be any crowding effect, which normally leads to soaring of interest rate. With healthy forex reserves and low oil price in the international market, India is now in a stronger position on the BOP side. Also, India’s short-term foreign debt is low and can be well managed.
Usually in crises, there are those who act and those who fear things. It is a high time for the government to fight the crisis courageously. Economic recoveries are all about building confidence by decisive actions. It is abundantly clear that the hand of the government is required to pull the economy out of the crisis. Unusual exigent circumstances require unorthodox measures.
E. Pathrose,
Kochi
