Saving India from capitalists who've suddenly turned socialists

Outside the Eco-Chamber

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public,” wrote Adam Smith in Book 1, Chapter 10 of The Wealth of Nations. Smith is an economist who is oft quoted and rarely read these days.

But the above line from Smith’s most famous tome finds a way to make a comeback into public memory, now and then, especially at times when an economic crisis is about to happen. Right now is that time.

Capitalists who otherwise want lesser government all the time, want to be bailed out the moment they smell an economic crisis brewing. Given that there is only so much money that any government has, if the government chooses to bailout capitalists, as it often does, it comes at the cost of the public. Money used to bail out capitalists could have easily gone towards something else.

As the economic crisis because of COVID-19 spreads, Indian capitalists have already started demanding that the government rescue them and the economy in the process.

“We need a stimulus of over $200 billion, with an ability to go up to $300 billion, with $100 billion provided immediately, $100 billion in 4 months and the last $100 billion in 8 months,” Niranjan Hiranandani, the president of the industry body of real estate developers Naredco and the business lobby, Assocham, recently demanded.

Assuming one dollar is worth Rs 76.3, $200 billion amounts to Rs 15.26 lakh crore and $300 billion amounts to Rs 22.89 lakh crore. To give a sense of proportion, the central government hopes to earn Rs 24.23 lakh crore as gross tax revenue in 2020-21. Given that it has to share a part of this revenue with state governments, the net tax revenue that the central government hopes to earn stands at Rs 16.36 lakh crore.

Of course, the government came up with these projections in February, when the budget was presented. A lot has changed since then and the chances of the government being able to earn what it has projected are minimal.

In this scenario, it is safe to say that Hiranandani wants the government to spend 100% or even more of the taxes it earns in providing a stimulus to the economy. The idea of an economic stimulus – or, the government spending money to revive an economy during an economic crisis -- goes back to the British economist John Maynard Keynes, who first suggested this in the aftermath of the Great Depression of 1929. In that sense, Hiranandani is basically following economic tradition. Trouble is, where will the government get Rs 15.26-Rs 22.89 lakh crore from?

This is an important question to ask, given that some sort of economic stimulus is expected. The government has already decided to deposit Rs 500 in Jan Dhan accounts of women for three months. A whole host of other small steps have also been announced. There is talk about a support package for the micro, small and medium enterprises. Big business, given its superior lobbying capabilities, is also going to get its pound of flesh.

If the lockdown is extended, the government may want to put more money into Jan Dhan accounts. There are 38.08 crore Jan Dhan accounts in total. If the governments puts Rs 3,000 in total in each of these accounts, it’s going to run up a bill of Rs 1,14,240 crore.

But where is this money going to come from? As economic activity will slowdown in 2020-21, there is no way the government will end up earning what it has projected. As economic activity slows down, collections of excise duty and goods and services tax, will fall. Further, as companies fire employees, cut salaries, postpone the joining of new hires and freeze new jobs, salaried incomes are bound to take a hit. This will have an impact on the income tax collected.

One option is to borrow more. The government borrows more by selling bonds. Selling more bonds will mean that bond market investors will demand a greater rate of return on these bonds. In fact, that has already started to happen, with the bond yield or the return on the 10-year government bond going up from 6% to 6.5% between March 27 and April 9.

The government bond yield acts as a sort of a benchmark for interest rates in the economy in general because lending to the government is the safest form of lending. If government bond yields go up, interest rates charged by banks for lending will also go up, or at least not fall as the RBI and the government expect them to. If interest rates go down, the hope is, people will borrow and spend more, businesses will borrow and expand, and this will help economic growth.

While it is inevitable that the government will end up borrowing more to finance its expenditure in 2020-21, it shouldn’t go overboard with it. In this scenario, it is important that the government tries to alleviable the pain of individuals, from migrant workers to daily wage labourers, rather than try to bailout corporates. It is also important that it spends money towards building a better public health infrastructure.

In fact, even venture-capital funded startups, which have blown up a lot of money over the years, want the government to pay “50% of the salary bills and contract wage bills for a period of April to September.”

With due apologies to Raghuram Rajan, it is important that the government saves itself from the capitalists who have suddenly discovered socialism, and does the right things to help the common man.