MATTERS OF FACT. Why Modi needs his version of ‘New Deal’

When Franklin D Roosevelt (FDR) took over as the President of the United States of America in March 1933, the world was in the midst of the Great Depression. The US economy was in deep distress. Its industrial production had crashed by 46 per cent, foreign trade had collapsed by 70 per cent, half its banks had failed, unemployment had risen by a staggering 607 per cent and hundreds of thousands of Americans were rendered homeless. He swept the elections, winning in all but six states, promising a ‘New Deal’. What then followed was a series of measures that not only brought growth back but also laid the foundation for what the US economy is today.

FDR did not have a magic wand. He did not believe in doles and so his ‘New Deal’ virtually had no fiscal stimulus. Monetary policy was used as the main lever for reviving growth. He went about reforming the economy and the markets (he created the Security and Exchange Commission). All these measures are similar to what is happening now in India which is struggling to come out of a pandemic-induced recession. Constrained by fiscal limitations, the Modi government has also been looking at monetary policy and structural reforms to induce growth rather than cash handouts. They are, however, proving to be insufficient.

But FDR also did something that the Modi government can well follow. A critical part of the ‘New Deal’ was an aspirational project to electrify rural America. Even though the first central power plant became operational in the US way back in 1882, less than 10 per cent of the rural areas had access to electricity even five decades later. Taking electricity to far-flung homes in rural areas was found to be unviable. It cost electricity companies as much as $2,000 per mile then to build distribution lines.

FDR, on the other hand, saw an opportunity to revolutionise farm life and boost employment at a time when 25 per cent of the workforce was without a job. His team came up with an innovative solution to fund the project. The government encouraged rural Americans to form co-operatives, borrow federal funds at low interest and build the distribution lines. In 20 years, as much as 96 per cent of farms had electricity. The Rural Electrification Act (REA) transformed the US rural economy comprehensively and the multiplier effect of this project contributed to the strong revival of the economy.

Prime Minister Modi likes to think big and this is the best time for him to come up with a visionary project that can transform India. The economy is in a piquant situation. All the four engines of growth are faltering. Private investment (at 22 per cent of GDP) has tanked sharply and is unlikely to recover in a hurry. Excess capacity, uncertainty about sustained revival in demand and heavily leveraged corporate balance sheets are forcing firms to repay debts rather than invest.

Experts do not see private investment bouncing back for a year or two. Exports, another growth engine, will be constrained by the global economy which is likely to shrink further considering the second wave of coronavirus and imposition of fresh set of lockdowns across Europe.

Public consumption is showing initial signs of reviving. It is not clear if it is pent-up demand or a genuine jump in spending. The fact that consumer confidence, as surveyed by the RBI, is at a historic low raises concern that the return of the consumers could be short-lived. Under the circumstances, government spending appears to be the only lever that the Modi government can use to kick-start growth. But it is constrained fiscally and cannot spend its way through this crisis without triggering inflation and higher interest rates.

Aspirational projects

An aspirational project with innovative funding mechanism is what the Modi government needs, to unleash the animal spirits in the economy. India has attempted this before, though not necessarily during a recession. The 5,846-km Golden Quadrilateral project helped boost economic growth and was funded innovatively through a cess on petrol/diesel and a BOOT model, where the user toll paid back the contractors who built the roads. India can do it again.

However, the visionary project must tick some boxes. It must have the maximum multiplier effect, should be the need of the hour with clear long-term benefits, must be one that can lead to a quick revival of private investment and, finally, it must be a project that lends itself to innovative funding options as the government will not be able to foot the bill entirely.

What can these projects be? A dedicated railway freight corridor has been in the works for a while. Maybe it is time to ramp it up. This project would help reduce logistics cost and also lower pollution as transportation of goods shifts from road to railways. The Railways has the wherewithal to raise the funds and the multiplier effect is high (demand for labour, steel, cement and so on). Public sector units can also be tapped to spearhead and fund some of the projects.

For instance, the Railways and coal PSUs can be tapped to build connectivity to the coal mines. Evacuating coal has been a big challenge in the country and this has caused imports to rise despite India’s large coal reserves. Such a project will also reduce the price of coal and consequently the cost of power making manufacturing competitive.

Creating agriculture-related infrastructure could be another option. India sorely lacks warehouse and cold-chain facilities. This has caused enormous wastage of produce and prevents farmers from realising higher price for their produce. An innovative scheme, in partnership with the private sector, to build warehousing facilities (including cold-storage wherever required) across the country for every cluster of villages will not only help government achieve its dream of doubling farmers income but also ensure that rural economy thrives in the future. The projects can also be in the space of rural healthcare, urban transportation, inland water transportation or even green energy.

FDR’s `New Deal’ helped the US recover from a painful economic shock. Modi needs to come up with his version of a ‘New Deal’ to help India recover from the largest economic contraction on record and the first in 40 years.