In the run up to the 2014 Parliamentary elections in India, Mr. Narendra Modi was able to convince about his ability to provide governance that takes care of the common man as well as the economic development of the nation. Unlike the predominantly negative approach of Aam Aadmi Party in pointing out finger at the corrupt and the unconvincing promises of the Congress led UPA having been in power for 10 years, the positive approach of Mr. Modi paid off handsomely with the BJP led NDA coming to power. The President's address to the Parliament after the new Govt. came to power spelt out plans for economic revival and the pro-poor policies to be implemented by Prime Minister Mr. Narendra Modi's government. The running theme of the speech was the fight to eradicate poverty and improve the condition of the poor. http://articles.economictimes.indiatimes.com/2014-06-10/news/50478549_1_sabka-vikas-food-inflation-crop-insurance
While Mr. Modi's intention to eliminate poverty, fight food inflation and provide urban facilities in rural areas may be genuine, in the same speech the President talked about launching a Diamond Quadrilateral project of high-speed trains connecting the four major metropolitan cities. Now, here comes the hitch: Mr. Modi is aiming at goals at two ends of the economic spectrum - to eliminate poverty by emphasising agro-based economy and at the same time to go in for high end technology stimulating urban growth. Now, both these goals cannot be priorities at the same time if we understand how economic development takes place in practice.
The key factor that stimulates economic activity is the so called 'animal spirits', first described by John Keynes in 1936. http://en.wikipedia.org/wiki/Animal_spirits_(Keynes) In his own words -- "Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations..... Most, probably, of our decisions to do something positive.....can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities". Though in somewhat technical language, the crux of the above statement is easily understood: investors go where they feel there is good prospect for their business.
Mr. Modi's declared pro-poor policy may, on paper, favour economic activity in rural areas but in reality the optimism it evokes among the business class will be the deciding factor. The entrepreneur's thinking will be something like this: 'The Govt. may give tax exemptions, subsidize electricity and do such things so as to attract investment in rural areas, but the return on investment would be much higher if the same investment is made in urban or semi-urban areas'. The investor would be energized by the very thought of investing in an urban setting with projects like hi-speed trains between the metro cities in the pipeline. 'Why go uphill in the rural area while the same effort in the urban area would bring returns much more easily' would be the simple logic.
Adding to this is the influence of lobbying in favour of pro-urban activity by the business class and others. While the pro-urban project may have 10 persons pushing for it, the pro-rural project may have hardly one person pushing for it. The bias is perfectly justified in financial terms and given the scarcity of funds, the pro-rural projects in all likelihood would find the going tough. Thus for Mr. Modi's plan for pro-rural, pro-poor development to become a reality it would be a case of taking into account the 'animal spirits' of the business class all along the way. Mr. Modi's talk of developing agro-economy and agro-technology has to overcome the 'animal spirits' of his own pro-urban plans like that of the hi-speed trains between metro cities.
This basic factor of 'animal spirits' was used selectively by the previous UPA Govt. whose policies energized urban development leaving the rural areas to fend for themselves. Despite the poverty alleviation programmes, the rural areas remained impoverished and there was no meaningful investment in the rural areas. To avoid repeating history again, the present Govt. can do one simple thing to balance the development process. For every pro-urban project that is sanctioned, it should facilitate the completion of at least ten rural projects. This would be a tough decision since investors will refrain from investing in rural areas and there would be a further fall in GDP for some years. International rating agencies may blacklist India for investment prospects.
But there is no alternative if Mr
Narendra Modi wants to keep his promise to eliminate poverty and work for
economic revival of the nation as a whole. Two things are needed: Strong
leadership uninfluenced by forces that paint a gloomy picture of the economy
(based on the decline of GDP or the investment prospects). Sound economic
practice of not ignoring selectively, the basic need for 'animal spirits' for
economic activity wherever it is needed. Mr. Modi, let us hope, is capable of