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Writer's pictureSudeep Shrivastava

Neo Keynesian economics in the Modi era- The new multiplier effect in play




Just as in the 1930s when the world was faced with the economic crises of colossus proportion a similar trend was seen during the Covid pandemic, Global trade stopped, supply chains got disrupted and economic growth plunged all-time low.

Every country had its unique challenge yet the common theme to turnaround the growth was that central banks should pump-prime the economy and hence the interest rates were barrelled down.


As per a BIS Working paper titled “ A global database on central banks’ monetary responses to Covid-19 “ (by Carlos Cantú, Paolo Cavallino, Fiorella De Fiore, and James Yetman) analyses in detail how the “Central banks around the world reacted quickly and on a massive scale to the pandemic – often in tandem with fiscal authorities. In advanced economies (AEs), their goal was twofold. First, and early during the pandemic, monetary policy measures aimed at stabilizing financial markets and preventing the pandemic from turning into a renewed financial crisis. Purchases of public assets and liquidity provision under favorable conditions were the main instruments of this type of intervention. When the liquidity situation of the household and corporate sectors started to deteriorate, central banks’ overriding goal became one of cushioning the contraction in real activity by ensuring the provision of credit to the private sector under attractive conditions, despite rising credit risk”.


While most of the advanced economies went out with the same toolkit as during the 2008 Financial crisis akin to Quantitative easing, there were some outliers like India who followed a hybrid approach.


The Keynesian effect

Taking a leaf out of Keynesian aggregate demand boost and thereby letting the multiplier take effect.

As the Covid raged, the Indian government announced a comprehensive economic package under the “Aatma Nirbhar Bharat Abhiyan” in five tranches amounting to USD 275 billion.


This was a mix of economic plus targeted sectoral stimulus which was a careful balance of boosting Aggregate Demand and supply.


One of the basic tenets of Keynesian theory has been that if government spending increases, and all other components of spending namely consumption and spending remain constant, then output will increase.

Keynes always argued that governments should solve problems in the short run rather than wait for the market forces to fix things over the long run. As he famously wrote, “In the long run we all will be dead”. Keynes always favored fine-tuning of the policies so that the economy was always close to full employment.


Policy at the centre-stage

The policies that the present government has started with the objective of creating employment have started gaining traction, of course, it will take a few quarters to see the impact on the ground in terms of employment offtake.

There are at present 16 employment generation programmes that are in progress, some of the known ones are MNREGA and the latest which gained global interest is been Production Linked Incentive Scheme (PLI). The 1.97-trillion rupees production-linked incentive scheme (PLI), launched in 2020, covers 14 sectors ranging from electronic products to drones, but it is being reviewed again and GoI is planning to ease and expand some norms for five sectors to help them better utilize its $24 billion industrial incentives aimed at boosting local manufacturing.

12 flagship programs have the potential to generate productive employment opportunities. Some of the key programs are Digital India, Make in India, Start Up India, and Pradhan Mantri Awas Yojana.


Word of caution and Immediate action points:

· Address the delays in Infra projects

o India has 135 infrastructure projects delayed by five years or more.

o According to the latest report for July 2023 by the Infrastructure and Project Monitoring Division (IPMD), 809 projects were delayed and 213 projects were behind schedule even after being granted extensions.

o The road transport and highways sector had the highest number of delayed projects at 262, followed by the railways at 115 and the petroleum sector at 89.

o As many as 388 projects were hit by cost overruns, too. The cost escalation of the 809 delayed projects added up to more than Rs 4.65 lakh crore as of July, according to the report.


· The manufacturing target should be 30% of GDP, release the New Industrial policy ASAP, only PLI cannot do the heavy lifting

o According to Crisil, the PLI scheme will account for 13-15 percent of the average annual investment spending in key industrial sectors over the next three to four years.

o The National Manufacturing Policy announced by the Union government in 2011 had set an objective of increasing the share of manufacturing in GDP to 25 percent and creating 100 million jobs by 2022. The NDA government had reiterated the target of 25 percent, even though manufacturing’s share hovers around 17 percent of GDP currently.


· The Agriculture sector needs a ring-fenced policy approach

o According to Dr Prashant Deshpande in his article in TOI, “Agriculture plays a significant role in India’s economic growth. With around 54.6% of the total workforce involved in agriculture and allied sector activities, the sector contributes 17.8% to the country’s Gross Value Added (GVA). During 2021-22, in the country’s total exports agricultural exports contributed to the tune of US $ 50.2 billion with a 20% increase from US $ 41.3 billion in 2020-21. In FY 2023, it is projected that the Indian agriculture sector will grow at a rate of 3.5%.

o What we need is the idea of the 4th Revolution in agriculture which according to experts involves heavy usage of tech, Big data, and Artificial intelligence to improve crop production and real-time monitoring, harvesting, processing, and marketing”.

Everyone knows that the Government goes on a slow lane as general elections are a few months away. However, it would be imperative that this government lays down its clear Policy glide path for Agriculture, manufacturing, and Infrastructure. Let the people know what they are voting for apart from the existing targeted schemes which have already reached the last-mile delivery.


The recent political trends show that the present regime will be back at the helm from 2024 for the next five years. This is evident from the stock market trajectory which has factored in the continuity of the present government. All India needs is a strong land decisive leadership and transparent policies where domestic as well as foreign players have a clear line of vision for them to lay their long-term bets. There is no stopping the economy from growing at an average rate of 6.5-8 percentage points in the next decade to come. And with the demographic dividend and consumption-driven economy, no country in the world can ignore India only to its peril.

The Way Forward

Make no mistake that India will be driving global growth in the decades to come, as Global investors learn the hard lessons from China. Xi Ping will be the next Mao which will and has already started to take China back to its centralised. Command and control regime. As China loses its demographic dividend which it enjoyed for the last 20 years it will no longer be the place for any global business to be there. Its not that China will entirely collapse but the golden era is already over, the fear is that to divert domestic mindshare and the growing restlessness among the young Chinese, Xi Ping will resort to the usual nationalistic toolkit and try to annex Taiwan which in real sense would be a geopolitical flashpoint.

Against this backdrop, India has to take advantage of the chaos in the global markets with the US-China rivalry out in the open and the World looking to delink from the China-centric supply chain. We are entering an era of Bilateralism and the death knell of multilateralism is upon us. As the World looks for China+n strategy for India the time is Now!.



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