The Union Budget 2018-19 in 5 charts

The Union Budget is a key document which informs the public about the Government’s socio-economic plans and priorities. It is important to critically evaluate this document because of our collective ‘failure to provide for full employment’ and the ‘arbitrary and inequitable distribution of wealth and incomes’; Keynes wrote this in 1936 and it continues to remain the same. Moreover, it is our collective right and responsibility to decide how the government should obtain its revenue and how it must be spent. No formula or algorithm exists for this. As Piketty wrote in his Capital in the Twenty-First Century, ‘Taxation is not a technical matter. It is preeminently a political and philosophical issue, perhaps the most important of all political issues. Without taxes, society has no common destiny, and collective action is impossible.

This blog post aims to outline the priorities of the current central government by examining the expenditure on physical and social infrastructure and the nature of taxes. This is done in 5 charts.

(1) Physical Infrastructure

Defence is significantly more important than roads, housing, food, and farmers’ welfare.


Capital Expenditure of Select Central Ministries (in Rs. Crore)
Source: Expenditure Budget Vol. 1, 2016-17, Statement 2, pp 4-9
All values are rounded off to the nearest crore.


(2) Social Infrastructure

Physical infrastructure creation is more important than social infrastructure creation.

Have the negative effects of physical infrastructure creation been accounted for?


 Total Allocations of Select Ministries (Rs. 112753 Crore)
Source: BS, p 36, Annex No. III-A to Part A
RE refers to revised estimates which include supplementary demands for funds made by the ministries during the financial year.
BE refers to budget estimates.


(3) Direct & Indirect Taxes

Our taxation policy is regressive due to the high proportion of indirect taxes.


Select Direct and Indirect Taxes (in Rs. Crore)
Source: Receipts Budget, 2018-2019, pp. 2-4


(4) Corporate Tax Concessions

Our tax concessions could approximately fund 75% of the social infrastructure spending estimate.



(5) Corporate Tax Structure

Our corporate taxes are regressive.


Effective tax rate paid by sample companies across range of PBT (FY 2016-17)
Source: Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2014-15 and 2015-16, p 30 of the Receipts Budget, 2016-2017, Annex-15.
1 Values rounded off to the nearest integer; hence the total adds up to 101 and not 100. Financial year 2012-13. The number of companies whose PBT is zero is 17,912 and their share in total income is around 9 per cent.


Concluding comments

Our government prioritises defence over agriculture. Our government prioritises physical infrastructure over social infrastructure and does not take into account ecological damage and the displacement caused due to physical infrastructure creation. And our taxation policy is regressive. We must use our collective rights and responsibilities to decide how the government should obtain its revenue and how it must be spent.

I thank Rahul Lahoti for inviting me to be a part of the panel which discussed the Union Budget at Azim Premji University-Undergraduate Campus on 14th February 2018, from which this post originated.

On free individual choice and collective inaction

PIC-blog post-collective inactionThe logic of contemporary economies is built on our belief in the virtues of ‘free’ individual choice. Adherents of this view, which include (most) governments, corporations and many individuals, believe that regulating individual choice is bad for the economy. However, among this syndicate, some do recognise the pitfalls of employing this principle in the development and growth of institutions relating to education and health. In economic parlance, the ‘failure’ of individual choice in yielding a socially beneficial outcome is termed a market failure – suggesting that markets, in general, do not fail. It is important to state the logic of individual choice explicitly owing to its enthralling grip over contemporary political and economic imagination. John Maynard Keynes in his 1926 critical essay ‘The End of Laissez-Faire’ makes explicit this logic: ‘by the working of natural laws individuals pursuing their own interests with enlightenment, in condition of freedom, always tend to promote the general interest at the same time!

How did private vice transform into private interest (and choice)? And how is it that private choice is at the core of today’s economics and politics? Albert Hirschman’s The Passions and Interests:Political Arguments for Capitalism Before its Triumph (1977) provides us with one compelling historical account. The idea that free individual choice results in socially beneficial outcomes is now commonplace. This was not always the case. In fact, Montesquieu, the French philosopher, wrote about the socially beneficial outcomes from pursuing honour which ‘brings life to all the parts of the body politic’ and ‘it turns out that everyone contributes to the general welfare while thinking that he works for his own interests.’ By the seventeenth century, it was recognised that the ‘disruptive passions of men’ could not be restrained by moral philosophers and their religious counterparts although attempts to convert the disruptive passions into ‘constructive’ passions were already underway. For instance, anticipating Adam Smith, Pascal, another French philosopher, writes that man ‘has managed to tease out of concupiscence an admirable arrangement’ and ‘so beautiful an order.’ Subsequently, the idea of ‘countervailing passions’ started gaining currency in political thought. However, as Hirschman also notes, what forces actually ensure that groups (of individuals) with conflicting passions/interests result in a gain for all? If the contemporary politics of climate change is taken as an example, the outcome runs contrary to such an expectation.

Today, the widespread belief especially among policy makers is that unregulated individual choices – whether as a consumer or a producer – will ensure that the fruits of economic growth trickle down to the poorest person. However as Keynes warned us very persuasively in The General Theory of Employment, Interest and Money (1936), this belief is flawed and we need government intervention so as to eliminate labour unemployment. Clearly, the pursuit of individual gains has not brought social gains. Mainstream economics accommodates this big flaw in marginalist economics under the label of externalities. Unintended consequences of economic actions may be positive or negative for the society. In the determination of output and employment, Keynes pointed out that the tendency towards full employment (a more modest claim than public interest or social welfare) is a fluke in liberal capitalism. To put it differently, unemployment of labour is the expected consequence in liberal capitalism.Both theoretically and empirically, all evidence points to one inescapable fact: liberal capitalism does not result in the full employment of labour. Another charge by Keynes against this view is that it commits the fallacy of composition: what is good for an individual may not be good for the society. For example, while saving is good for an individual, if all individuals in a society save, who will consume the output?

Amitav Ghosh in The Great Derangement: Climate Change and the Unthinkable (2016), his recent* work of non-fiction, forcefully argues that the paralysis of climate change politics lies in our idea of individual freedom; our ‘calculus of liberty’ has no place for nature and natural systems. How then can our idea of freedom – a product of Enlightenment thinking – and its close relative, democracy, ever effectively address our environmental issues? A solution to our environmental problems warrants collective and concerted action. This is consistently absent in current politics, which has been reduced to individual morals and choices. Indeed, the onus of resisting environmental degradation has been passed on to the individual by appealing to her morals. As Ghosh puts it in his The Great Derangement, ‘This then is the paradox and the price of conceiving of fiction and politics in terms of individual moral adventures: it negates possibility itself.’ Both fiction and politics, at their core, are, or rather, ought to be about possibilities –possibilities for the individual as well as the society as a whole.

The idea that free pursuit of individual interest yields a socially beneficial outcome is a flawed piece of political and economic imagination. Unfortunately, this principle does not function in today’s capitalist societies and the belief that it does is a dangerous one to safeguard. The idea that free individual choices yield socially beneficial outcomes must therefore be challenged in all possible spaces committed to documenting and exploring socioeconomic possibilities, particularly in humanities, journalism, literature, and the social sciences.

*I thank Vivek Nenmini for pointing out an error. Earlier, I had written that The Great Derangement is Ghosh’s first work of non-fiction.

On the Determinants of Investment

It is well known that an economy’s output levels and employment levels are determined by the level of investment. The popular story presented in mainstream textbooks and taught in conventional courses is that of planned saving adapting to planned investment, with the rate of interest as the equilibrating factor. This is the supply-side vision of the economy wherein demand can never be a constraint except temporarily due to frictions or imperfections. Additionally, this view reaches the conclusion that that there is a tendency to full-employment in capitalist economies. This blog post revisits the saving-investment relationship, the investment function and the link between the rate of interest and investment. Given the crucial role investment plays in an economy, it is important that we critically appraise its determinants.

By investment, economists mean the purchase of capital goods and not financial assets. Saving refers to the income that is not consumed. Saving is a leakage from the economy while investment is an injection. Marginalist (neoclassical) economics maintains that planned saving and planned investment are equilibrated through variations in the rate of interest which is assumed to be sufficiently sensitive to any saving-investment disequilibrium. Planned saving is a positive function of the rate of interest while planned investment is a negative function of the rate of interest. When planned saving is in excess of planned investment, there is excess savings which puts a downward pressure on the rate of interest and vice versa. However, is such an a priori functional link between the rate of interest and the rate of accumulation a correct one? The 1960s capital theory debate demonstrates the implausibility of an interest-elastic investment function on logical grounds. Also, in a world where the rate of interest is set by monetary policy (and therefore exogenous to the saving-investment process) it is unclear how it can play the role of an equilibrating force as suggested by marginalist economics.

The non-orthodox approach to activity levels and growth draws inspiration from the principle of effective demand of Kalecki and Keynes. The investment function is not interest-elastic in this theoretical approach, also called the demand-led approach. Here, investment depends on ‘the future expected level of effective demand (D+1), which tells us how much capacity firms will need, and on the current technical conditions of production (represented in this simple model by the normal capital-output ratio)…’ (Serrano 1995: 78; available freely here). In this simple model, note that production is assumed to be carried out with circulating capital only. So, I = aD+1 where a is the capital-output ratio. A change in technology will affect the capital-output ratio, which indicates how much of capital is required to produce one unit of output. Further, we make the realistic assumption that firms do not systematically err in their expectations. The expectations of firms of course depend on policy certainty. Policy uncertainty affects consumption and investment decisions in an adverse manner.

As a matter of fact, a recent IMF working paper on the situation of India provides partial support to the demand-led approach. They note: ‘Real interest rates account for only one quarter of the explained investment slowdown.’ For them, the key factor is policy uncertainty, but, the demand-led growth theorists, I think, will advocate the examination of the exact mechanisms through which monetary and/or fiscal policies have deterred investment. Without explaining further in this blog post, the answer might be found in the manner in which autonomous elements of demand such as autonomous consumption, research & development expenditures, government expenditures and foreign expenditures are affected by policy uncertainty. To conclude, it is time that the interest-elastic investment function is seriously questioned both on theoretical and empirical grounds, and subsequently discarded.

A Foreword to Keynes’s General Theory

Published in 1936, The General Theory of Employment Interest and Money remains a valuable book for both economists and policy makers. The recent financial crisis and the ongoing economic crisis have revived popular interest in this 1936 classic. The year 2009 saw the publication of two concise books on Keynes by two eminent scholars, Skidelsky and Clarke; an earlier blog post reviewed both their works. Not much will be said about the author – John Maynard Keynes, in the following paragraphs. The main objective of this blog post, as the title suggests, is to provide a foreword to The General Theory. By foreword, we mean the following: ‘The introduction to a literary work, usually stating its subject, purpose, scope, method, etc.’ (Oxford English Dictionary).

The rapidly expanding market for economics textbooks has, to a significant extent, substituted the reading of original works. In this environment, where our understanding of Keynes is based upon what Blanchard, Branson, Mankiw or Romer write, the following blog post strives to remain faithful to Keynes unlike the IS-LM version of Keynes proposed by Hicks and popularised by these textbooks. Keynes labelled Ricardo, Marshall and Pigou as Classical economists; this definition is not adhered to in the present blog post for Classical economics is a system of economic theory (to which Ricardo belongs) which is distinct from and a rival to Marginalist economics of which Marshall and Pigou are important members (see Thomas 2011 for more).

For Marshall, Pigou and marginalist economists of today, unemployment is a transitory phenomenon caused by ‘imperfections’ in the operation of the market forces. In their theoretical world characterised by competition, full employment is the ‘general’ case. However, Keynes demonstrated that this notion was based on assumptions contrary to the real world such as flexibility of money wages, absence of store of value function of money and rate of interest as a real phenomenon capable of equilibrating savings and investment and hence can only be considered a ‘special’ case. As he writes, ‘there has been a fundamental misunderstanding of how in this respect the economy in which we live actually works’ (p. 13). Opposed to this state of affairs, Keynes argued that the ‘general’ situation in an economy with competitive markets is the prevalence on unemployment. In other words, the central purpose of Keynes’s work is to demonstrate that unemployment is the usual situation in a competitive economy.

The main subject matter of The General Theory is the determination of aggregate employment and income or ‘the theory of output as a whole’ (Preface, p. vi). This needs to be seen against the then prevalent mode of economic analysis which was largely Marshallian in nature. Marginal productivity theory along with the principle of substitution was employed to understand the allocation of a given level of output; under conditions of competition, in equilibrium, full employment was (and still is) expected to prevail. And questions concerning the determination of the level of output were carried out within a theory whose primary subject matter was allocation, and not determination, of output levels. (On this, see especially Keynes’s preface to the German edition of his 1936 book.)

Marginalist economics, in the 1900s, looked up to the works of Marshall, and Pigou.  Keynes was brought up on a large dose of their works. Theories of production concentrated on determining the output levels in individual markets, and more often on allocation of output. Similarly, theories of distribution examined the allocation of income to workers and capitalists. Policy recommendations were made on the basis of such theories. The remedy to unemployment, according to Pigou and other orthodox economists, consisted in lowering workers’ wages. Economics certainly did not have an apparatus or a framework to study the ‘level of output as a whole’, or macroeconomics as it is called today. Besides output levels, Keynes also stressed the role played by money in ‘real’ analysis – the examination of income, employment, investment, consumption and saving. Rate of interest, according to Keynes, is a monetary phenomenon which depends on liquid preference. In short, the scope of his work remained the same as that of earlier economists – the study of wealth. Today, economics has broadened its scope to include any subject which can be examined by employing some form of the cost-benefit analysis. (See Malthus: The Scope of Political Economy)

Being brought up in the marginalist Marshallian tradition, Keynes attempted to completely break away from their method. In the preface to the German edition, he makes his desire explicit: ‘It was in this [Marshallian] atmosphere that I was brought up. I taught these doctrines myself and it is only within the last decade that I have been conscious of their insufficiency. In my own thought and development, therefore, this book represents a reaction, a transition away from the English classical (or orthodox) tradition.’ However, his attempt was not entirely successful. This is especially visible in his analysis of investment, where he develops the ‘marginal efficiency of capital’; much has been written on this in the context of the capital theory debates. The role he assigned to ‘expectations’ and the links to investment levels have been considered an improvement of the economists’ toolkit and consequently seen as an improvement in the capacity of economic theory to understand reality.

The aim of this blog post has been mainly to put The General Theory in the 1936 context, where Marshallian economics reigned supreme. Today, central governments, central banks and policy makers employ macroeconomic theory to understand the real world and to frame policies which increase output levels, stabilise prices and ensure financial stability. However, majority of these theories remain rooted in the orthodox tradition (variants of Marshall, Walras, Pigou and others resurface in the form of DSGE, New Classical macroeconomics or New Keynesian macroeconomics) which Keynes broke away from. Truly, The General Theory published in 1936 remains an economics classic, which is of enduring value to those who find terrible problems with the current orthodoxy!