Spend, urges the FM, to sustain the feel good feeling
New Delhi, Oct 06: The month from Navaratri to Deepavali is the Indian equivalent of Christmas and New Year. A time to spend. Coming as this festival season does at the end of the monsoon season its spending propensity has for centuries been dictated by the record of rainfall. Saraswati, Durga, Lakshmi, Rama and all other gods and godesses who are propitiated in this festive season owe the joy and spending of their devotees to the munificence of the Rain God. In an agrarian world, that relationship is direct and manifest. In the modern industrial and urban economy, it is mediated more by sentiment than the actual impact of the monsoon on purchasing power. No one seems to have understood this equation better for this year than Union Finance Minister Jaswant Singh. Having kept a low profile through the post-budget months and the summer, Jaswant Singh has stepped forward as the monsoon clouds recede to urge consumers to spend and to convince investors to invest.

In an interview to The Financial Express last month he acknowledged that the “feel-good feeling has to be sustained” through new investment. Investment impacts growth with a lag. So he followed up that advice with a suggestion that consumers must go shopping this festival season. If the incipient economic recovery underway can be sustained by spending and investment decisions then the economy can ride on the current wave of optimism generated by a good monsoon. Sure, it will take more than a monsoon to place the economy on a higher growth trajectory. It also takes more than a monsoon to sustain the feel good sentiment. The latter requires an environment of political stability and optimism about future prospects for good governance. I am convinced that the economic acceleration of the mid-1990s was driven as much by real economic phenomena like improved fiscal governance and trade and investment liberalisation, as it was by the mood of optimism that was pervasive in that period, despite the electoral debacles of the party in power, the financial sector scams and the communal tensions generated by the destruction of the Babri Masjid. All these negatives paled into insignificance when ordinary consumers and investors imagined that the economy and the country had turned a corner and things would get better. Expectations had been altered by changed perceptions. Expectations, as the 20th century’s greatest economist John Maynard Keynes suggested, have a way of altering reality. When ideas capture the minds of men, Karl Marx put it, they become a material force. The idea of economic betterment had captured India in the 1990s, much the same way it did China a decade earlier. It took a beating in the late 1990s when political uncertainties came to the fore.
Our political leadership has still not understood the close relationship between social and political uncertainty and economic stability and growth. To imagine that investors will invest and consumers will consume irrespective of how they perceive the future goes against common sense economics. The key to good political management of a modern economy is to constantly instill in people confidence about their future. Positive expectations have positive outcomes. Jaswant Singh seems to have understood this simple lesson of modern economics and is urging us to spend because he sees, quite correctly, in every spending decision a vote of confidence in the economy’s future.
This may sound counter-intuitive because it may be regarded that the real vote of confidence in the future is a saving decision rather than a spending decision. Therein lies, what economists call the fallacy of composition. What is good for the individual is not always and necessarily good for the collective.
Individuals and households secure their future by saving more, but economies prosper when they spend more! Increased spending generates income and encourages new investment that in turn generates the income from which new savings are generated.
Investment can finance itself, at the macro level, by bringing forth increased savings, while saving for the sake of saving need not generate new investment. Spending trends also influence the expectations of investors and thereby stimulate the demand for investible resources.
Jaswant Singh always prefaces his public statements on policy with the caveat that he is not an economist, but he need not any longer for he has discovered the key to Keynesian macro-economics. The role of expectations. Perhaps his is a hangover from the Manmohan Singh era.
Manmohan Singh was the only economist to become a “successful” finance minister. While there have been other trained economists in that job before, Manmohan Singh brought a new elan to the job by steering the economy through turbulent times. The secret of his success was that he altered expectations. Analysts trying to understand what Manmohan Singh did to move the economy from 5.5 per cent growth to 7.0 per cent growth in a short period of time look in vain for specific policy measures. Singh’s success cannot be explained in purely economic or fiscal terms. He spurred growth by altering the state of expectations.
What the government of Atal Bihari Vajpayee has only recently begun to understand is that it must also alter the state of expectations to accelerate growth. The focus on projects like national highways and urban metros is good but these in themselves do not alter expectations if people see these as one-off interventions. Public expenditure of this sort has its positive multiplier effect on national income, as every economics graduate knows, but what can really accelerate growth is an altered state of expectations based on confidence and optimism about the future.
The latter requires a conducive political and social environment for the medium term. Since finance ministers can do very little about altering that environment and since their focus is traditionally on the current fiscal it is entirely understandable that Jaswant Singh is focussed more specifically on the next six months.
If he can carry forward the monsoon’s magic into the festival season and sustain the sentiment from Navaratri to Deepavali and beyond, perhaps all the way to Christmas and the New Year, and the winter harvest festivals of Sankranti and Lohri, the boost to consumer spending can push growth further up.