Of late there are lots of economic falsehoods being spread around about India’s economy by the Modi government, and it’s lapdog media. The first one being India becomes the fourth-largest economy of the world, overtaking Japan, and the second is its extreme poverty rate declining to 5.3% after the World Bank raised its poverty line to $3 a day. These are statistical gimmicks carried out on paper without any connection to the ground realities of poor, hungry, wretched, and corrupt India. Comparing India to Japan, whose per capita income is close to $35,000, is like comparing a goat with an elephant. Saying that India’s extreme poverty declined by half in the past decade due to the World Bank’s raising of its poverty line definition is disingenuous. All these data manipulations are good for fooling the public and political sloganeering, but they do not change the sad ground realities. People spreading these falsehoods should be ashamed of themselves, but shame is in a short supply in new India.
While reading the newspaper The Economic Times I came across another badly written economic article spreading more such falsehoods. Here I want to quickly critique the arguments presented in that article. I have presented these same arguments many times in the past, but It’s important to repeat them here just to set the record straight. I will be very brief.
The article under focus here is titled Big 4: Drivers that will power India’s economy. The four big drivers presented are:
- Government spending
- Rural consumption
- Low interest rates; and
- Consumer demand.
Will these big four drivers power the Indian economy or destroy it? If you understand sound economics then you know the answer: it will destroy it. Not a single one of them are India’s saviors.
First, government spending is a pure waste of society’s resources, which are already very scarce in India. Any single rupee that the government spends is taken away from the private economy. Politicians and bureaucrats do not and cannot know what people want. They will always spend other people’s money in winning votes for a lifelong career and salaries for themselves, and for their family and friends. Ordinary people always suffer from a socialist central planning of the economy. The Keynesian argument of government spending boosting economy is a lie. Anyone interested in understanding the detailed arguments about the numerous fallacies of the Keynesian economics can read Henry Hazlitt’s book, Failure of New Economics. It is far better that resources remain in private hands.
Second, consumption (rural or urban) is not a driver of the economy. Saving and investment are. Economic growth takes place in the future, and consumption of resources takes place in the present. Any resource that is being consumed is unavailable, via saving and investment, for generating future growth. What we consume cannot be saved and invested. I will advise my readers to refer to my old article where I discussed this economic logic in detail.
Third, low interest rates will only generate more inflation, unemployment, business cycles (boom and bust), and inequality of income and wealth. RBI’s manipulation of interest rates is slowly eroding the capital base of the Indian economy, and by doing so making everyone poorer in the future. I will again advise my readers to refer to my old article where I have treated this subject in detail.
Fourth, just like rural consumption, consumer demand is not going to drive any future economic growth. In fact, it will retard it. As David Ricardo said, and I paraphrase, consumer demand is never a problem. It is always present. The difficulty is with production. Higher future production (economic growth) is only possible when more producer goods (land, labor, and capital goods) are available. These producer goods are only available via saving and investment. Any consumer demand i.e., consumption, will reduce saving and investment thereby making higher future production impossible.
In conclusion, instead of boosting economic growth, the four big drivers mentioned by The Economic Times newspaper will only generate more inflation, business cycles, unemployment, inequality of income and wealth, and poverty and starvation (low economic growth).
For me personally, it is so sad to see that the economic dialogue in India has so degraded (almost disappeared) over a period of time that simple Keynesian economic fallacies are now seen as gospel truths. All political parties including the ruling BJP and the opposition Congress espouse Keynesianism. As US president Richard Nixon once said, all are Keynesians (in India). Keynesianism is the death knell of any economy. It is better for Indians to learn about its falsehoods to safeguard their future.
