Budget Thrust: Which infrastructure?
The budget has laid considerable emphasis on public investment in infrastructure.
The budget has laid considerable emphasis on public investment in infrastructure. Generally, by infrastructure we understand highways, airports, solar power plants and the like. These infrastructures are mostly used by large companies.
A highway enables the textile manufacturer in Surat to reach his clothing to the markets in Kolkata with ease. However, this has a flip side. The local manufacturers in Kolkata are not able to compete with Surat because the cheap goods produced by the latter now reach Kolkata at a low cost. Clothing from Surat would become expensive in Kolkata if the highway is not in a good condition and the cost of transport was more. In that case, the local manufacturer would be able to survive. Thus, investment in large infrastructure is good for big companies but is detrimental to small businesses.
It is indeed true that part of the business of big companies trickles down to small vendors. However, the "trickle" is only a trickle when we need torrents. The benefits to large companies then rebound on them. The poor people lose their jobs and they do not have purchasing power to buy the goods produced by the big companies. There is no demand in the market and the big companies also flounder. Sage Basawa of Karnataka said that it may be true that the Brahmins were born from the head and the Sudras were from the feet, but can a Brahmin survive if his foot is cut off? Similarly, the wealth of the rich is dependent upon increased consumption by the poor. Therefore, the rich suffer if we make large infrastructure that hits at the consumption by the poor.
The present approach of building large-scale infrastructure is, therefore, counterproductive. No wonder, a number of reports say that private investment in the country has been declining over the last few years despite huge investments in infrastructure and the government having reduced the rates of corporate income tax and given number of tax concessions like the production-linked incentives.
The reason is that these concessions are being given to the rich to the detriment of the poor. Just as too much ghee with less roti can cause indigestion, so also too much large infrastructure with loss of jobs is causing indigestion in the economy. This is not to say that big infrastructure should not be made.
The need is to create a balance between large- and small infrastructure; or between increased production by big businesses and increased demand by the poor people. For example, better water supply and sewage in the slums, more mobile towers and free wi-fi in rural areas and small towns, better bus services and such infrastructure would improve the ability of the poor people to produce their goods like paper envelopes, hand-printed clothing and agarbattis at a low cost and help them compete with big businesses. The small manufacturer will be able to reach his goods to the market quickly by bus instead of having to bicycle 5 km. This will enable the small businesses to compete with machine-made goods.
Similarly, if the government provides free Wi-Fi in small towns, then the unemployed graduates can provide online tuition. Doctors who are presently earning merely Rs 20,000 per month can provide services as telemedicine and earn more. Such infrastructure will generate demand from the poor and make it profitable for the big businesses to produce more. It will become a win-win situation.
The difficulty with the present dispensation is that the investment is imbalanced and heavily tilted in favour of big businesses. The poor are not be able to compete with machines, they are losing their jobs and the market of the big businesses is itself disappearing. In this background we have to understand why measures to promote investment are not working.
The Finance Minister has said in her budget speech that private and public investment will jumpstart the economy. She has put considerable stress on provision of Production Linked Incentives to the manufacturing sector and other such incentives. She said that a large number of jobs will be created. However, the total number of jobs in the manufacturing sector in the country has actually been decreasing in absolute numbers in the last seven years. The reason is that robots and automatic machines are taking over the manufacturing activities. Businessmen find it profitable to employ machines rather than men.
In this situation even if the government provides even more incentives to the industries and the industries do make investments and produce higher amount of goods; yet jobs will not be created, demand will not be created and the goods will lie unsold in the godowns of the big companies. Our former president Pranav Mukherjee had once said that it is very dangerous to rely on the "trickledown theory." Therefore, it will not be sufficient to say that we are increasing investment in infrastructure and providing incentives to big businesses. One has to create balance between the pro-rich and the pro-poor infrastructure.
The investment in pro-poor infrastructure such as Wi-Fi and buses is also important because the future demand is going to come from the services sector and not from manufacturing sector. A rich person will eat the same two roti as the poor person, nay, he may eat less. The demand for goods does not increase much with rise in the level of income.
The demand for services, however, increases and increases. Rich need telemedicine, online tuitions, customized movies, translations and the like. Services like online tuitions and telemedicine cannot be fully automated even by artificial intelligence. India has a unique advantage of having a large number of youths who are somewhat proficient in English and supply these services globally. Therefore, there is a need for change in strategy. The government should invest in pro-poor infrastructure more than in the poor-rich infrastructure, especially in the infrastructure that enables the poor to export their services over the internet. That will create demand in the market for the goods produced by the big businesses as well. The rich will invest to produce those goods without the need for Production Linked Incentives.
(The author is former Professor of Economics at IIM, Bengaluru)
(The opinions expressed in this column are those of the writer. The facts and opinions expressed here do not reflect the views of The Hans India)