India needs a Keynesian Solution to get out of the

Current Slowdown
Introduction
John Maynard Keynes was the most influential economist in the first half of the 20th century. His ideas
are still relevant today as they were during his lifetime.

Keynes’ book, ‘The General Theory of Employment, Interest and Money’, marked the beginning of
macroeconomics, which deals with the economy as a whole. Keeping in view the radical nature of
analysis, fundamentally different explanations and remedial measures, we often use the term
‘Keynesian Revolution’. The popularity of his ideas can be gauged from the fact that by the 1960s, most
economists in the world subscribed to Keynesian thought.

The Great Depression

The Great Depression (1929-33) was a major setback to the world economy. Systematic decline in
output, wages, and prices; sudden increase in unemployment to 25%; stock market crash and loss of
wealth were among the symptoms. The outcome was widespread poverty, starvation, and mental
anguish.

The economic analysis during the Great Depression was on classical lines. Classical economists
suggested minimal role of the government, laissez faire, and believed in the efficacy of market
mechanism. According to them, if a commodity is produced, demand for it will rise because the workers
involved in the production process will be paid, which they will eventually spend on buying the goods
and services.

Classical economists were unable to find a solution to the problems that arose from the Great
Depression. The majority of people did not have money to spend, and those who had, did not spend it
because they expected prices to fall. Inventories began to accumulate and factories saw no reason to
continue producing.

Keynes came up with a new set of ideas around that time. He emphasized the importance of total
demand. According to him, ‘demand will create its own supply' as long as there are unemployed
resources in the economy. Purchases by households, private sector, and the government, would create
demand. During a recession, household demand and spending are low. Because the private sector is
driven by profit, and entrepreneurs see that their businesses are unlikely to take off in the near future,
they do not grow.

In such circumstances, the government should increase expenditure. Increased government

expenditure boosts demand for goods and services, and supply (production) comes up automatically.
The objective should be to put money in the hands of people, who will spend further on goods and
services.
Covid-19 Setback
The government now faces a tricky situation for Covid-19. Production has been disrupted, labour
relocated and demand for goods and services has been stifled due to mandatory lockdown. The
sequence of events was also unexpected: the workers had no work and no income.

Circumstances led to the movement of labour to their native places. What we're seeing is a process of
reverse migration from active urban growth centers to dormant rural areas. The relocation of labour to
rural areas has far-reaching consequences beyond job loss and increased unemployment.

First, reverse migration is from advanced States to less developed ones where employment
opportunities are much less. The migrant workers have to compete with local labour, where the former
is at a disadvantage.

Second, most of the migrant workers are either semi-skilled or skilled; they worked in the informal
sector or in micro, small scale and medium enterprises. Their adaptation to locally available agricultural
jobs is far from easy.
Third, the migrant workers were a source of cheap labour in the urban areas. The urban areas have to
bear the brunt of reverse migration in terms of shortages of labour, rise in the cost of living, and decline
in the production of goods and services.

The government had started the unlocking process in a phased manner. The ground reality is that
millions of people still have no job, no income, and no money to spend. Thus, a large section of people is
reeling under depression and distress. At this juncture, one looks for policy alternatives, and the
recommendations of Keynes come in handy.

Reigniting Economy
The Indian economy has been in a delicate condition and growth figures, released recently, indicate that
the increase in GDP during 2019-20 was 4.2%, the lowest in the past 11 years. In the last quarter
(January-March) of 2019-20, GDP growth was a meagre 3.1%. Despite the government's efforts to revive
the economy by interest rate cuts, corporate tax rate cuts, and bank capitalization, the Indian economy
had a lackluster performance during the previous financial year.
The recovery of the Indian economy after the lockdown is an uphill task. The situation appears to be a
re-enactment of the Great Depression. Furthermore, people are hesitant to leave their homes. Creating
a work environment and managing the supply chain in such conditions is extremely difficult. A far more
daunting task, however, is to create an environment where people spend money – that will generate
demand for goods and services.

Of course, today's economy is much more complicated than it was a century ago. The presence of
foreign funds in domestic markets is critical; a flight of foreign funds could destabilize the foreign
exchange market. The Indian economy's constitutional framework, especially the Fiscal Responsibility
and Budget Management Act, places additional constraints on the government's maneuverability. In
addition, there is a widespread belief that Indian consumers do not spend enough these days. All of this
necessitates Keynesian prescriptions on demand management.

Fiscal Stimulus
The government announced an economic stimulus package worth Rs 20.97 lakh crore. On the surface, it
appears to be a substantial sum, but it has drawn criticism from several quarters for a variety of reasons.
It is said to be skewed toward the supply side, with incentives for farmers to take out loans and produce
more, while ignoring demand management. Another criticism is that the expenditure from the central
government budget is negligible – around Rs 1.97 lakh crore (0.8% of GDP). The Reserve Bank of India is
in charge of the bulk of the stimulus package, which aims to increase liquidity and credit growth in the
economy.
The package is a continuation of the policy of managing liquidity in the economy that has been there for
the past few years. One issue is that credit growth in the Indian economy has been slow in recent years.
Making a cash reserve is necessary, but it isn't sufficient in itself. The private sector will not borrow more
money from banks unless it sees an increase in demand for the goods and services it plans to produce
with the borrowed funds. In such a situation, relying solely on supply-side measures is unlikely to yield
the desired results.

Aggregate demand must be boosted for the recovery of Indian economy. The most viable choice
appears to be immediate job creation on a large scale through government initiative. This is intended to
protect the poor from further suffering and prevent potential disorder in society. In this respect, a much
bigger role should be envisaged for MGNREGA, which assures employment to people in rural areas and
strengthen rural infrastructure.

Conclusion
Keynes advocated the government to take an activist role, which is urgently needed in the present
situation. Currently, there is no labour available where production takes place, and there are no jobs
available where migrant labour is re-settled. The urgent need is to restore labor's trust so that they
return to their previous location; or to provide infrastructural facilities in backward regions so that
MSME shifts there. Both systems, on the other hand, are wishful thinking that cannot be realized in the
short term but may be possible in the long term. And Keynes would say, “This long run is a misleading
guide to current affairs. In the long run, we are all dead.”

References
https://theprint.in/opinion/keynes-can-rescue-modi-govt-from-covid-economic-crisis-but-it-first-needs-
funds/441230/

https://www.thequint.com/voices/opinion/coronavirus-indian-economy-lockdown-keynesian-model-
economics-modi-govt-state-expenditure#read-more

https://www.businesstoday.in/union-budget-2020/expectations/budget-2020-indian-economic-growth-
slowdown-turn-to-john-maynard-keynes-gdp-unemployment/story/393889.html

https://www.bbc.com/news/world-asia-india-49470466