As John M. Keynes wrote his seminal work, The General Theory of Employment, Interest and Money, Widely refuted in the context of the Great Depression, what he called “Say’s Law”, usually abbreviated as “supply makes its own demand”. According to Keynes, this was the only major principle of classical economics. Nonetheless, classical economists did not rule out the phenomenon of economic recession, even though their reasons differed from those pointed to by Keynes, and their analysis is arguably consistent with modern business-cycle theories.
For a long time, academic efforts have been made to establish the origin of Say’s Law and to confirm its true meaning. In fact, responses are still being exchanged in this debate, even though little effort has been made to understand it in the context of a developed world economy and its relevance to public policy. Economics is a contextual study and Say’s Law should be scrutinized as an underlying principle rather than as an absolute consequence. As a discipline, economics is full of debates, but good ideas ultimately prevail. The triumph of behavioral economics in recent years against the prevailing stereotypes of rational-actor-based modeling is an example. Likewise, the essential insight behind Say’s law needs to be recognized amidst the noise of controversy. It can provide a valuable perspective on the empirical world, inform academics and soften the rigidity in adopting different views.
Governments, especially developing countries, have attempted to optimize state spending with the aim of maximizing its beneficial effect across sectors, choosing between competitive uses of limited financial resources. The allocation, however, requires more deliberation. Infrastructure spending is one such lever that can have a beneficial effect on the rest of the economy. A 2019 report by the Reserve Bank of India found that the multiplier ratio of ‘central capex’ is 3.25, which has been intuitively understood by Indian policy makers since the rise of central planning. In the Sixth Five Year Plan (1980-85) the focus was on infrastructure for the first time and remained an important component of all subsequent plans and budgets. Its share has only increased in a myriad of ways, both in terms of budget allocation and our policy focus. The definition of infrastructure keeps on expanding, providing easy bank credit and attractive tax benefits to the projects involved. The government has made huge financial commitments through Production Linked Incentive (PLI) schemes as well as the “Panchamrut Commitments” made in COP-21, which aims to create a state-of-the-art and adaptive infrastructure to rev up India’s growth engine. While coping with climate change, it demonstrates its prominence even in times of economic disruption and transition imperatives.
In 2019, India had announced an ambitious investment agenda called the National Infrastructure Pipeline (NIP) for a period of six years ending 2024-25. 111 trillion (or $1.5 trillion). This story is true for other countries as well. For example, China spent $8 trillion in 2020 and the US is in the process of gaining approval for its Build Back Better bill, which aims to invest $1 trillion in both traditional and advanced infrastructure. Today’s policy landscape speaks volumes of state-directed interventions that have stood the test of time and space. Developing and developed countries alike are taking the same financial route of supply-led expansion to meet their economic aspirations.
Infrastructure spending is not only useful to help a rapidly growing nation achieve its ambitions, but plays an important role in times of economic crisis as a policy option. A calibrated approach to develop a broad enabling base for the economy has been at the core of our strategy, not just digging and filling potholes (which is the usual caricature of Keynesian stimulus policies). As CRISIL recently reported, India’s central capital expenditure grew 31% over the previous fiscal, despite the government’s tight fiscal position. If this trend sustains, it will surpass the 12% pre-pandemic trend level.
It is not unusual that China has resorted to investment in infrastructure to revive its economy every time it shows signs of slowdown. There is a geo-strategic element to this in US infrastructure planning, but the timing of its immediate post-Covid economic crisis suggests a similar one. fiscal stance.
The overarching objective is to push the economy into a good cycle of mutually strong supply and demand in ways that increase supply, which creates jobs, increases income and creates demand, resulting in higher demand. development trajectory is achieved. The subtlety of this argument lies in rejecting a long-standing dichotomy between demand and supply. Any investment that increases production capacity is a supply-side phenomenon that can increase demand.
The importance of the initial supply push cannot be overstated, but the size of its snowball effect warrants detailed scrutiny of the data. But we must acknowledge that supply and demand operate in an interconnected cycle, outpacing each other, and this should underpin our policy responses.
Broadly speaking, front-loaded supply-based interventions are a popular public-policy option for a reason: Supply expansion can drive demand and thus have a lasting positive impact on our economy.
Monika is Assistant Director in the Ministry of Rural Development, Government of India
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