Growth vs. Glory, Sound of Silence

Growth vs Glory

Bharat Mandapam Wikipedia image

Growth requires investment.

As I get off my cycle after a heart-pounding cycle ride up the hill roads, I realise this is true, not just of the economy, but also of athletic improvement, which demands chunks of time devoted to training. Or intellectual growth, with an unceasing investment in reading and engaging with the world of ideas.

One of the major fault lines of the Indian economy is that investment has been faltering for over a decade now. Expressed as Gross Fixed Capital Formation (GFCF), investment’s share in Indian GDP dropped from just under 40% in 2011-12, to the current level of just over 30%. This has deep implications for growth, as our government is well aware.

The government’s response is to increase its own allocation to capital expenditure, and to announce schemes, such as PLI, to incentivise companies to produce more. The Finance Minister often states that the government’s investments will ‘crowd in’ private sector investment. This is the idea that, if the government builds roads, then transport operators will buy trucks, oil companies will erect petrol pumps, and dhaba owners will set up tandoors, creating employment, income, and demand.

This investment-led approach to revive the economy has a long history - monarchs built palaces to provide employment during times of drought, and the US government set up the Works Progress Administration (WPA) in response to the Great Depression. In 1935, the US government allocated almost 7% of the nation’s GDP to the WPA; for music lovers like me, the iconic Red Rocks amphitheatre outside Denver is a reminder that such programs can have a lasting impact on the economy.

There are at least three potential problems with government-led investment, and as is almost invariably true of matters economic, they are deeply interrelated:

The first has to do with resources. Most modern governments spend more than they earn, and fund this gap by way of borrowing. If the economy doesn’t revive adequately, tax revenues grow slowly, government debt expands, interest rates go up, and companies find it more expensive to create new capacity. The private sector gets crowded out, rather than crowded in.

The second has to do with the private sector’s response. There is no guarantee that the private sector will follow the lead of the government, and build out new capacity. A recent report by the financial firm Motilal Oswal sets out the cold numbers - capital expenditure by companies, as a share of GDP, peaked at 25% in 2008-09, and slumped to 12% during the epidemic, in 2020-21. Though there was some recovery in the following year, to 13.2%, the most recent number, for April to June of this year, is 12.3%. As the Motilal Oswal report states, the private sector responds to demand, and as of now, most companies have sufficient capacity to meet consumer demand, and are not in a hurry to invest in creating more capacity. 

The third concern, which is inherent in the first, has to do with results. If government investment is unproductive, it does not generate enough economic activity to justify the expenditure. Chinese investment-led growth is replete with examples of roads to nowhere. It is often challenging to estimate the economic return from infrastructure projects, and India’s brief but torrid romance with Public-Private-Partnership (PPP) in the sector went sour largely because of endemic overestimation of revenue. 

In the last couple of years, India’s capital, Delhi, has seen a rash of massive projects like the Bharat Mandapam, and the makeover of Delhi’s Central Vista. The latest addition to Delhi’s landscape, inaugurated this morning by the PM on his birthday, is the 5400 cr. Yashabhoomi convention center. ‘Yash’ is the Hindi word for splendor, majesty, luxury, eminence, or fame, most apt for a project that can never be justified by the economic return on its outlay. Appeals to national pride are very emotive, but unfortunately these projects have a real financial cost, and crowd out other government investment from its perennially constrained budgets.

Investments, whether by government or business, are key to our economic growth, and to the welfare of hundreds of millions of poor Indians. But if they are to fulfil that promise, they must be subject to deep, clear-eyed scrutiny. This is especially true when it is public funds that are being spent. Increasingly, though, it appears as if the vanity projects of the current regime are exempt from all such rational oversight, which is damaging, both for the notion of executive responsibility, as also for our economic future.

*https://en.wikipedia.org/wiki/Works_Progress_Administration

**https://www.zeebiz.com/economy-infra/news-pm-modi-to-inaugurate-yashobhoomi-in-dwarka-on-sunday-here-s-all-you-need-to-know-254283

Sounds of Silence

The evening has fallen. It seems too early for dusk, a reminder that the summer will soon be behind us, and the rains, and the crisp cold of a Kumaon autumn will take their place. My wife just drew the curtains, and shut out the world. I can hear the silence. The harder I listen, the more it rings in my ears. The red needle of the sound meter flickers, then settles at 25 decibels. 

That's scarcely lower than the 28 it registered in the afternoon, when I could hear the geese paddle in the pond, and the occasional bird in the live fence. When a car  intruded into our landscape, and swooshed around the bend, the sound meter was alarmed, skeetered up to 44, then settled back below 30, with an almost audible sigh of relief.

When we were installing new glazing in our Delhi home, the vendor said that the noise standard set for the refurbishment of the Oberoi Hotel, was a maximum of 35 decibels. Sitting in our living room, despite 3 layers of glass, the traffic on the Outer Ring Road set the ambient noise level at a low of 48 decibels. The low rumble of a straining bus pushed the noise level up to 54 decibels, an insistent horn set up a spike of 63. From our Delhi home, the quiet of a room at the Oberoi, overlooking the many green shades of the golf course, seemed a distant luxury. 

Here in Satoli, the silence is so deep that I can hear the difference between 25 and 28 decibels. The quiet that surrounds us heightens my awareness of the chatter of my own brain. If awareness is a first step to progress, I hope that my brain waves will settle - with an audible sigh of relief - to the meditative quiet of this mountain village.