Page 199 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes
Example: In India, there have been, not one, but three shocks all occurring simultaneously;
One, pay raises of government employees; two, reprisals against the Pokhran test; and three, the
East-Asian meltdown. So, we are indeed under the threat of stagflation. How can we avoid that
infection?
One remedy is that of Keynes. Unfortunately, his method works only when budget deficits are
pumped into productive investment, and productive investment, only. In India, the moment
politicians and bureaucrats see the sight of any money (however artificially), they squander it
on useless consumption.

So, all these years, what we have got is a lot of inflation but little growth.

Example: Since planning began, the salaries of Class-D employees have gone up a hundred
times but their real incomes have barely doubled. That is 98 per cent of all salary increases paid
out of budget deficits have gone down the inflation train, and barely 2 per cent has been the real
benefit. Let us admit it: our politics will not let deploy budget deficits wisely and productively.
So, Keynes is not for us!

These days, fashion favours privatisation. That is attractive and persuasive in theory. However,
there is a catch. Along with privatisation, there should be a corresponding reduction in
government employment. Unfortunately, that is impossible in our country.
Liberalisation has eliminated much of the work that used to be done by DGTD and by the
Department of Electronics. There has however, not been any reduction in numbers employed on
that account. In practice, the situation is worse.
Instead of cutting down on surplus employees, the government economises on essential
expenditure on back needs like infrastructure, education and health. That generates bottlenecks
all around.

Example: Private enterprise may produce more cars but there will be no roads to ride
on. Even the few roads that are there will be so full of potholes as to be worthless. So, however,
rosy may be the dreams of supply side economics, they are not realised in practice.
Both these solutions – the Keynesian and the supply side ones – are essentially losing games as
the genius of Indian politics is more for losing than for winning. We have not been able to
deploy either technique without losing a lot and winning but little. However, there is a third
solution – a win-win game. Just as stagflation results from a shock, its cure also needs a shock, a
countershock!

Suppose some shock (or a set of shocks) is introduced which will drive the supply curve
downwards, not upwards. That is, suppose the figure is viewed the opposite way; assuming the
supply curve is shifted from S S to SS. Then, equilibrium will shift from E to E. In that case
1 1 1
prices will decrease and simultaneously output will increase – we will win on both counts.
Is it indeed possible to drive the supply curve downward? It is. That is what technology does all
the time. By definition, improved technology cuts down the cost of men, material and money.
Thereby, it lowers the supply curve and generates growth without inflation. There is no dispute
that we need better technology. It is also accepted that Indians are adapt at technology – particularly
when they work abroad.
So, we have the intellectual base needed to generate technology. What we do not have is the
managerial skill to make good use of the technological abilities we possess. Basically, more
than technology, we need better management of technology.

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