The IMF has also done it. Trying to frighten us with the spectre of the Great Depression. The International Monetary Fund’s prediction that the coronavirus pandemic will cause the world economy to suffer its worst recession since the Great Depression raises a question for India. Will Prime Minister Narendra Modi give in to the political temptation to be India’s Franklin D. Roosevelt and unleash massive government spending and a 21st-century version of the New Deal?
The coronavirus lockdowns have grounded economies and are likely to precipitate what Fareed Zakaria called “a series of cascading crisis” and “economic paralysis”.
The IMF’s statement also said emerging markets are at high risk.
In search of a Roosevelt
Over 17 million Americans have filed for unemployment benefits. India’s unemployment rate in the last week of March and first week of April crossed 23 per cent, up from 7.1 per cent in January, according to the Centre for Monitoring Indian Economy (CMIE).
As more people make comparisons to the Great Depression era, there is now a considerable Roosevelt nostalgia building up too. People are urging policymakers to “learn from President Franklin D. Roosevelt’s response to the Great Depression.”
Between 1933 and 1939, Roosevelt presided over the largest bout of government assistance — unleashing the New Deal, which included heavy focus on public works projects to put money in people’s hands. The government became the largest employer in the United States, and even built some lasting assets like the Tennessee Valley Authority.
Will a similar new New Deal to fight the corona-infected economy be Modi’s new masterstroke?
Great Depression, a modern metaphor
In India, Modi has in the past six years demonstrated that he believes in ‘maximum government’ and socio-populism. Will the economic troubles bring out a Narendra Roosevelt Modi who will build cities and highways?
The Great Depression is often mentioned today more as a metaphor than as a factually accurate reference. Even the 2008 financial crisis was compared to the Great Depression by many. It wasn’t true then. Though it took the US and European economies over a decade to rebound, many economies like China recovered sooner. And stocks and other markets across the world recovered faster, within a year.
The IMF’s latest usage of that metaphor apart, already enough people are declaring that all talk of fiscal conservatism is now dead because of the coronavirus pandemic. Even the US government’s $2 trillion coronavirus relief stimulus is not enough, they say. Aggressively spend, spend, spend seems to be the mantra.
It’s not the 1930s
But Roosevelt’s Keynesian largesse – building large stadiums, schools and parks – is unlikely to make a difference in the new economic order of the 21st century. This is an era when private investment has a crucial role to play, along with public investment.
Also, economies today cannot be controlled or nudged by governments like Roosevelt probably could back in the 1930s. There are bigger players than just the government that are involved today.
For example, the market cap of Exxon, one of the largest publicly traded companies, is larger than the GDPs of some nations. Hedge funds can invest and move trillions of dollars every day. So the chances for a government and central bank to pull an economy out of deep, paralytic slowdown are limited today.
In a world of interconnected economies, something as ephemeral as sentiment can hold more sway than government stimulus packages.
In fact, stability of policy and a government resolve can go a long way in boosting sentiment. But under Modi, there is always a fear of a new disruption around the corner masquerading as a ‘masterstroke’.
Modi’s fiscal options
But the big question is: where will the money come from? Will Modi continue with the grand Central Vista and project it as job creation for the poor?
Will he pull a rabbit out of the hat and raise funds through dollar bonds, NRI bonds, end all remaining restrictions on foreign investors, tap sovereign funds of wealthy nations like those in the Middle East, ask Indians to give gold or get RBI to print more money (and risk more inflation)? Roosevelt ended prohibition. With The Economy Act, he cut the pay of those who worked for the government and military by 15 per cent. He set up a mechanism that set up lending systems to bring private capital into publicly funded projects — like India’s own PPP.
Choice between politics and economy
There is now a wide consensus that the Modi government has mostly been about politics and winning elections and has shown comparatively less regard for the economy. It has managed to decouple election victories from economic performance.
And that’s where Modi can take a leaf out of the Roosevelt book.
Even though the New Deal lifted elderly people out of poverty and put in place the social security programme, there are many scholars like Jim Powell who have said that it hurt the economy more in his 2003 book FDR’s Folly: How Roosevelt and His New Deal Prolonged the Depression.
But the New Deal politics helped Roosevelt politically. He was elected four times. In fact, his adviser Harry Hopkins had famously said: “We will spend and spend, tax and tax, elect and elect.”
Because of this, even the American constitution had to be amended to limit a president to two terms.
The political benefits is why there is a real risk that Roosevelt can become an obvious template for maximalist Modi. Will a new New Deal to fight the corona-infected economy be Modi’s new masterstroke?
Views are personal.