Calcutta, March 16: Finance minister Amit Mitra was eloquent while discussing the budget in the Assembly on Thursday, injecting John Maynard Keynes into Bengal’s policy discourse.
Mitra referred to the Keynesian multiplier effect — the concept that increased government spending will result in a self-sustaining chain reaction generating more jobs and more economic activity that, in turn, will fuel more spending.
So carried away was the finance minister — a PhD in economics from Duke University — that he told Opposition leader Surjya Kanta Mishra: “Dr Mishra, you are a doctor. So, how will you know about this?”
Not just the medical doctor, it appears some economists are also now trying to figure out the effectiveness of Mitra’s version of the Keynesian multiplier in Bengal.
If Mitra is hoping to stimulate aggregate demand as suggested by the Keynesian multiplier, his priorities appear to have been misplaced and his kitty too small.
He has been generous in his allocations for departments directly under chief minister Mamata Banerjee — information and cultural affairs and minority affairs and madarsa education. In contrast, the allocations for departments where higher spending can result in long-term benefits have either come down or the increase has been modest. (See chart)
While presenting his budget, Mitra had referred to Keynes to explain the growth potential of his budget proposals.
“The additional resources generated will help to build the much-needed social and physical infrastructure and spur economic growth through the Keynesian multiplier effect, benefiting businesses greatly. Common people will get better infrastructure, schooling and health facilities, etc,” Mitra had said.
Mitra’s words cannot be questioned as adoption of the Keynesian prescription has helped several countries — like the depression-affected US economy — to achieve a higher growth trajectory.
But the questions crop up when the finance minister’s budget proposals are studied in detail.
“Keynesian multiplier is not only about increasing government expenditure. The effect of the multiplier depends on the quantum of the rise and the thrust areas of the government,” said a city-based economist who did not wish to be named.
According to the economist, a 14.2 per cent rise in plan expenditure — which results in creation of assets and productive capacities — cannot “spur economic growth” as Mitra had claimed in his budget speech.
The hike cannot be called “substantial” at a time headline inflation has been hovering around 10 per cent — which means the price rise cancels out most of the increase in the expenditure.
The focus of government spending is the other concern as allocations for the next fiscal under some heads — which have forward and backward linkages with other sectors in the economy — have been pruned from the revised estimate for 2012-13.
“A significant part of the allocation will be spent on organising fairs and festivals in case of the information and cultural affairs department, while the funds under the minority affairs will be spent on giving out doles. Such spending can never generate the desired Keynesian multiplier effect and I hope the finance minister is aware of that,” said another economist.
According to him, the multiplier effect could be felt if the government ploughed in the money to create assets — like schools and hospitals — and develop skills among the minority community. So far, the government’s actions have given the impression that stress is being laid on direct handouts than on skill-building. It remains to be seen if the government will change course in the new financial year.
But budget documents reveal that Mitra has been generous in case of some other departments — public health engineering, health and family welfare and irrigation and waterways. These allocations should result in some multiplier effect.
Mitra, who has not taken questions outside the House since tabling his budget proposals, was not available for comment on the nature of government spending. In the House, however, the finance minister tested Mishra’s knowledge in economics. Mishra told Mitra that the finance minister had referred to the “same old” Keynesian multiplier effect in his budget speech.
It was against this backdrop that Mitra set up the test, saying: “You seem to be undermining the Keynesian multiplier effect. Please don’t undermine Keynes. All of us know about Keynes’s prescription to get out of the Great Depression in the 1930s…. Dr Mishra, you are a doctor. So, how will you know about this?”
Asked, Mishra told The Telegraph on Friday: “I had only made a simple point and asked the finance minister the effectiveness of the Keynesian multiplier in Bengal’s context in view of the government’s policies… He didn’t give any answer and tried to test my knowledge of the subject, which is unfortunate.”
Mitra’s assertion that the Keynesian multiplier effect would benefit Bengal faced some other questions as well when an economist referred to lack of industries in the state.
“Say we assume that the Keynesian multiplier is operating in Bengal and pushing demand… But the question is whether we have enough industries in Bengal to take the benefit of higher consumption demand?” asked the economist.
The government’s dependence on borrowing to support its spending was the other reason why Mitra faced another uncomfortable question.
“The increased government spending is on account of fiscal profligacy, which will force the government to borrow more, for which it will have to pay interest. If the rate of interest on the borrowing is higher than the rate of growth of the state, which is the case for Bengal, there is the problem of a debt trap,” said an economist.