India’s Growth Story :

Keynesianism vs Neoliberalism

- Dr. Kewal Raj

 Background
• Since Great Depression of 1930s the world economic policy has been mainly
determined by the principles of Keynesianism and Neoliberalism.
• The former signifies greater state participation where as the later stands for a mid
path between classical liberalism, and socialist planning.
• Looking back to the economic history, the utter failure of the classical theory could
be seen during 1930s when the world was in the grip of Great Depression .
• The world GDP decreased by 15 percent during four years i.e 1929-32.
• In USA alone 1.5 million workers were unemployed and their number rose to 52
million in 1933 i.e 25% of the total labour force.
 Background
• It was a clear cut evidence of market failure and the capitalistic economies started looking
towards the government for help.
• Keynesian logic that private sector decisions mostly lead to adverse macro implications
turned out to be a reality and need for government intervention, started gaining
importance.
• The world as a whole started pursuing Keynesian model as a cure of economic ills, not only
during the phase of Great Depression and Second World War but in the post war economic
development (1945-73), labeled as Second Golden Age of Capitalism also .
• Naomi Klein a Canadian journalist has supported the view that the high economic growth
experienced by Europe and America was the outcome of the Keynesian economic policies.
 Background
• However, in the mid-1970s the Keynesian impulse went into reversal which could be
attributed to the fall outs of Vietnam War and the OPEC oil price shocks that led to price
rise without economic growth.
• In 1970s and early 1980s the problem of stagflation was a clear cut indication of the failure
of the Keynesian theory as fiscal and monetary policy proved to be ineffective.
• Milton Friedman disfavored government’s dynamic role for achieving economic stability
and growth.
• A group of his students popularly known as Chicago Boys, started advocating extensive
deregulation, privatization, and free market policies for strictly controlled economies.
 Background
• In later 1970s, the policies reducing the role of the state were introduced
which marked the culmination of the supremacy of Keynesian Theory.
• In 1980s, US, Canada, Britain and West Germany preferred to adopt
Neoliberalism in the form of economic policy.
• In this decade, the global economy optimistically started transforming into
competitive market by lessening controls and restrictions.
 Neoliberalism
• In early 1990s, neoliberalism was adopted worldwide and there were free
movements of goods, services and capital.
• But the belief that this would revive the global economy and developing countries
would experience faster growth to catch up with the developed nations , proved to
be ill-founded.
• A study covering 117 nations, undertaken In 1997, by L.Prichett did not find any
evidence of reduction of disparities among the developed and developing
countries.
• Rather the economic unevenness got accentuated.
 Neoliberalism
• As per the recent observations, in Organization for Cooperation and Economic
Development(OECD)economies, the ratio between the bottom 10% and the top 10% has
increased from 1:7 to 1:9 in the last 25 years.
• In January 2015, it has been further claimed that the wealthiest 1 percent would own more than
half of the global wealth by 2016.
• As per the forecasts made by a Switzerland based Credit Suisse Group in 2014, these accelerating
inequalities are gradually leading the world to the recessionary state.
• International Monetary Fund in its latest report,’ Neoliberalism: oversold, (2016)’, gave its
observations in the following words:
• “Instead of delivering growth, some neoliberal policies have increased inequality, in turn
jeopardizing durable expansion”.
 India’s Case
• Indian policy has been almost consistent with the world economic thinking.
• After the attainment of liberation from the foreign yoke, it was increasingly
realized that the country’s socio-economic problems could not be solved
without the active participation and support of the govt.
• This policy was in line with the Keynesian Model being pursued all over the
world.
• The vigorous state participation was an absolute necessity for bringing
economy on the right track.
 India’s Case
• The system of planning was introduced with the twin objective of growth with social
justice.
• Doubtlessly, the miraculous success of Soviet planning was a guiding factor in our policy
formulation but unlike Russia, we opted for mixed economic system with larger state
involvement.
• The results were highly disappointing. The working of the Public Sector Units was
inefficient resulting in loss of state exchequer and financial sector was found to be
irresponsive to the market needs.
• The average GDP growth rate attained during the first, second and third five year plan was
3.6 percent, 4.1 percent and 2.5 percent respectively. During the fourth five years plan (1969-
74), Gross Domestic Product rose at the rate of 3.3 percent.
 India’s Case
• The performance of the economy was extremely dismal as the annual growth rate over this
period of planning ( 1951-74) was averaged to be just 3.5 percent where as the
corresponding figure in case of OECD countries was found to be 4.9 percent during 1945-
1973(Second Golden Age,).
• Keynesian model of growth though proved to be much useful for the rest of the world in
this span, could not yield the desired dividends to Indian economy.
• It may be due to the reason that the model was not executed in its original version.
Keynesian economic policies advocated mixed economic system with predominance of
private sector and active participation of the government.
• In India it was almost opposite as there was domination of the public sector with lesser role
left for the private sector.
 Neoliberalism in India
• In tune with the global policy, in India too during mid 1970s and 1980, there was
partial reduction of state controls.
• With the collapse of Soviet planning during 1986-90, India became cautious about
the dangerous implications of the policies of state control and started heading
towards neoliberalism.
• The relief measures adopted for the organized industrial sector stimulated private
investment with positive impact upon the GDP growth rate that was found to be
5.6 percent during Sixth and Seventh Five Year Plan(1981-82 to1991-92) .
 Neoliberalism in India
• This accelerated growth was the immediate outcome of the lessening of government controls,
trade liberalization and tax reforms. It was a step towards free market mechanism and integration
with the global market
• Neoliberalism in India has widened gap between the rich and the poor.
• As per the findings of Boston Consulting Group in its study ‘Global Wealth: Winning the
Growth Game, 928 Indian ultra-high net worth houses(wealth over $100 million) were holding
20% of the country’s wealth in 2014 and their share is likely to go up to 24% in 2019.
• It is further reported by the Organization for Cooperation and Economic Development
(OECD)that the income disparities in India have doubled over the past two decades as top 10%
of people earn 12 times more than the bottom 10% as compared to 6 times 20 years ago.
 Neoliberalism in India
• According to the latest data on global wealth from Credit Suisse Group AG, (the
financial services company based in Zurich), the richest 1% of Indians owned 49%
of country’s wealth in 2014 which has gone up to 58.4% in 2016.
• It is further confirmed that India is one of the most unequal societies as the top
1% in India own 58.4% of the country’s wealth where as this figure is 49.3% in
Indonesia, 47.9.3%in Brazil,43.8% in China and41.9%in South Africa.
• The benefits of growth have mainly gone to the top 10-15% of the people.
• The extent of disparity can be very well gauged from the fact that the price of a
single meal in a five star hotel is Rs 5000/- which is the same as the monthly
earnings of 74% of rural household.
 Neoliberalism in India
• On one side there are excessive food wastages in marriages and social celebrations and on
the other side children of the poor have to die for want of food.
• In Reuter report (2012), 3000 children die every day due to illness caused by the poor diets.
• Human Development Report(2014) states, “If India is not in a state of famine, it is quite
clearly in a state of chronic hunger”.
• On water front, P. Sainth observed that on one side luxurious facility of swimming pools on
every floor in some of the star hotels is available where as on the other extreme, people
have to face acute drinking water scarcities.
• The gap between the haves and have-nots has increased in the LPG era.
 Sectoral Divergences
• It is not only at the individual income level but at the sectoral level too, the instances of
sectoral divergences and neglect of some sectors are distinctly visible.
• In the glamour of globalization, agriculture, rural and unorganized sector were criminally
neglected.
• The agriculture sector which absorbs almost two third of the workforce and the rural
sector accommodating three fourth of the poor, did not receive the desired attention
• There has been a mismatch between the country’s GDP and resource allocation for rural
sector development .
• The GDP During 1980-81 to 2014-15, GDP increased 17 times where as rise in the rural
development expenditure was just 3.6 times
 Sectoral Divergences
• Further there exists urban bias in the development activity in the post liberalization period as better
educated and better placed people have exploited most of the economic opportunities where as less
educated and illiterate rural masses are deprived of these growth avenues
• India’s Gini coefficient rose from 45 in 1990 to 51 in 2013 mainly on account of rising inequality between
urban and rural areas as well as within urban areas.
• The corporate sector has been helped by the government by grant of financial support, in the form of
subsidized loans and silent acceptance of default loans by the banks with astonishing ease.(Bhaduri,2016).
• A scheme of providing hidden subsidies to large business houses through the 36 largest, banks as non
performing assets(NPAs) has been recently estimated as 6.3 trillion rupees(Majjumdar,2016).
• The concessions given to the corporate sector in terms of ‘incentives’ are not criticized also as firstly
these are invisible to the general public and secondly these are considered as govt. policy measures for
promoting private investment.
 Sectoral Divergences
• Strangely enough there are 52,911 profit earning companies in India that are paying no tax to the
government. (Parakh, 2016)
• On the contrary, reliefs given to the agriculture are far less. The farmers facing frequent crop
failures, unfavorable weather conditions, tube well breakdowns and rising debt burden, are
compelled to commit suicides and this has taken the shape of regular tragedy to be faced by the
farm sector. Over 12000 farmers commit suicides every year as per the information given by the
government to the supreme court.( Mahapatra , 2017).
• At the time of adopting the LPG policy in 1991, it was implicit that in the pursuit of privatization
and disinvestment operations, funds released would be diverted to the development of far-flung
areas but there was only a marginal rise in the rural development expenditure, from 7 per cent in
the pre-reform decade to 8 per cent in the post-globalized era.(Dawar,2015) .
 Economic Slow Down
• The economy is in the state of slow down and with this pace of growth employment of the
youth is the worst victim.
• Rather the employment elasticity of output has witnessed a declining tendency. In 1972-73
to 1982-83,it was 0.60 which further declined to 0.41 and 0.17 in the following two decades
and finally rested at 0.04 during 2004-05 to 2011-12.(Nayar,2017)
• As indicated in the Economic Survey Report 2016,the inappropriate and ill timed execution
of the demonetization policy has definite destabilizing influence on trade, growth and
employment.
• As per the recent observations of Centre for Monitoring Indian Economy (CMIE), 1.5
million jobs have been lost in the first four months of 2017 due to demonetization.
 Need for review and reversal
• The negative effects of neoliberalism are being faced by the country as well as the
world.
• For stable and sustainable growth, the income gaps need to be minimized.
• As recently observed by the five IMF economists, the state governments must
focus upon the bottom 20 percent of the population in order to improve growth
of the economy rather than prioritizing the top 20 percent which will bring down
the growth.
• It has been further revealed that rise in the income share of top 20 percent by 1
percent slows down the growth by 0.08 percent and on the contrary the same rise in
the income share of the bottom 20 percent improves growth by 0.38 percent.
 Need for review and reversal
• United Nations Development Programme (2014) has rightly asserted that, the investments in the sectors and
jobs concerning the weaker section of society need to be prioritized in order to curb the yawning economic
• It is being commonly believed that present policy of neoliberalism needs to be seriously reviewed and
reversed. There is a growing perception in favor of Keynesianism for removing demand deficiency with the
sole objective of achieving growth with stability and save the world from imminent recessionary dips.
• It has been rightly observed by a sociology professor from New York University, Vivek Chibber(2017) “Neo-
liberalism is in an economic crisis since the recession of 2007-08. It means that income and growth have
stagnated in the West.”
• The need for departure from neoliberalism and active role of the state is clearly indicated in case of Indian
economy also. The state has to be cautiously active and the things cannot be left in the private hands.
 Need for review and reversal
• The debatable point is that what should be the extent of state control. It has been observed
that with increased state control in the form of expanded public sector, bank nationalization
and removal of privy purses the growth could not be satisfactory and incidence of poverty
remained unchanged.
• With relaxation of controls followed by widening and opening of the market to the rest of
the world, the rate of growth improved no doubt but the other problems like economic
divergences, recessionary evidences, unemployment and perennial poverty still remain
unsolved.
• The state of perpetual poverty being faced by a big chunk of population and non fulfillment of its basic
requirements have created a general environment of dissatisfaction in the country and the result is that
country ranks at 125 out of 178 countries surveyed with ‘180’ as Satisfaction with living Index.
 Need for review and reversal
• It needs to be emphasized that not only govt. control but well coordinated
regulatory mechanism accompanied by good governance and ethical
standards is required.
• Deviation from ethics is bound to breed corruption which seriously hampers
the growth process.
• The deficient areas such as rural infrastructure, education, health and
transportation need to be prioritized
 Need for review and reversal
• There is a clear cut option for the active state role with vigilant monitoring of the
private sector to bring the economy on the path of stable and sustainable growth.
Merely vociferous slogans and alluring ideas, skillfully presented and artistically
communicated are not going to solve the problems of the country.
• What is required is crystal clear planning, time bound target achievement , efficient
and ethical administration and regular scrutiny of the private sector with a set of
relaxations and regulations.
• The major issue is about the nature and extent of their respective roles, which again
cannot be permanently demarcated. It has to be flexible and adaptable according to
the social requirements, economic needs and political conditions of the country.
 Need for review and reversal
• History of capitalism suggests that economic development initiatives have come out
to be successful mostly in those countries where govt. and market act as
complementary and adapt and adjust to each other ( Nayar,2017 ).
• The role of the state needs to be performed religiously, ethically and efficiently.
• What is important is how genuinely state feels about the needs of the economy and
woes of the masses.
• The state though being a political entity must prioritize economics over politics,
general welfare over party interest and collective cause over the individual gains.
 Need for review and reversal
• Along with it, we must have a set of our own principles and patterns of
development based upon the country’s needs rather than giving them
frequent twists under the external influences.
• Gobind Nankani, a former Vice President for Africa at the World Bank has
rightly observed
• “There is no unique set of rules--------.We need to get away from formulae
and search for elusive ‘best practices’-----”
THANK YOU