In terms of economic policy, Narendra Modi’s government must be perhaps the most conservative in the world. During the entire period of the pandemic when millions of people lost their income and livelihoods, most governments around the world provided universal cash transfers to the people, but not to the Modi government.

True, many other Third World countries did not provide such universal cash transfers either, but their hands were tied; they had contracted a heavy external debt and were forced into austerity by agencies like the International Monetary Fund (IMF) which helped them roll over their debt. But, India was not subject to such external pressure to pursue austerity and avoid making transfers to workers. The Modi government’s neglect of the people was entirely its own decision, born out of blind faith in political conservatism. And the bankruptcy of such conservatism is now visible to all.

Public spending is kept tight in order to control the budget deficit so that inflation remains low. But, despite the restriction of public spending, wholesale inflation in May was 12.94% and retail inflation 6.30%, and even the budget deficit as a percentage of GDP was soaring.

The economy is supposed to revive thanks to the massive tax advantages granted to companies, once the lockdown is lifted; but the growth rate of the industrial production index was 3.1% in May, against 4.3% in April (and this, without base effect).

Likewise, conservative economic policies are supposed to please globalized finance, attract financial flows and maintain the exchange rate; but the rupee has come under considerable pressure lately. Thus, conservative economic policies produce results very opposite to what they are supposed to produce. And now the capitalists themselves are getting tired of it. The very class in whose interests conservative policies are meant to be pursued now openly oppose these policies.

TV Narendran, a Tata executive who is the current chairman of the Confederation of Indian Industry, presented a proposal on behalf of the CII, suggesting a fiscal stimulus of Rs 3 lakh crore, including a provision for transfers into cash. This means that the cash transfer proposal is now being made at all levels, not only by economists, opposition political parties and civil society organizations, but even by the body of capitalists itself. Not that they all make identical suggestions; but they all recognize what is obvious to everyone except the Modi government, namely that the real problem in today’s economy stems from a lack of purchasing power in the hands of the people, which can be corrected by providing cash transfers.

Compare that with the absurd claim by government economists that handing over purchasing power to the people would be of no use, as it would not result in higher consumer spending for them!

Equally striking is the fact that Uday Kotak, the owner of the Kotak Mahindra Bank, demanded not only a widening of the budget deficit, but also the printing of money to finance it, which is quite unthinkable for conservative economists.

Compare this position with the government’s position, set out in an affidavit to the Supreme Court, where the government says it has no money to make ex gratia payments to those who have died from COVID-19.

If we take the Union Government’s own figures and even update them, the total number of people who have died from COVID-19 would not exceed four lakh. At the rate of Rs 4 lakh per person, the total compensation would amount to Rs 16,000 crore. The fact that a government spending Rs 20,000 crore on a grandiose, unnecessary and utterly vandalist project like Central Vista does not have the money to help victims of COVID speaks volumes about its ethical priorities.

But, the relevant point here is that even a banker, Uday Kotak, sees nothing wrong with printing government money. The government’s claim that it has no money to make ex gratia payments, in other words, would not even convince the capitalists.

It is not that the capitalists have suddenly taken a liking to the people; it’s just that they are stubborn and realistic enough to see that a recovery in the economy requires money transfers to the population.

This is precisely where the poverty of the conservative economy defended by the Modi government lies: he believes that the recovery of the economy requires not an increase in purchasing power in the hands of the people but a reduction in it. this. His reasoning is as follows: a recovery requires either the absence of an increase in public spending, or an increase in this spending mainly devoted to infrastructure investments. Since the public deficit must be brought under control and the taxation of capitalists is abolished (on the contrary, they must be encouraged), any increase in public expenditure must be financed at the expense of the workers. And this is best done by increasing indirect taxes.

The obvious mistake in this thinking is that if government spending increases by taxing workers, then since workers more or less consume what they earn, there is very little net increase in aggregate demand: the increase of the demand generated by public spending is offset by the decrease in demand caused by the reduction in workers’ consumption. There can be no economic recovery under these conditions.

In addition, as workers are crushed by indirect taxes, there is a rise in prices. Because of this fiscal inflation, even to maintain its old level of real spending, the government has to increase nominal spending, as capitalists do (only workers cannot increase nominal spending, which is precisely how they are compressed).

Therefore, the government must obtain additional indirect tax revenues that are greater than (and a multiple of) the additional spending it proposed to make at the original prices, which means higher inflation than initially appeared to be. necessary. The economy therefore obtains no incentive to expand even when inflation is high.

This is exactly what is happening in the Indian economy. Public spending hardly stimulates the economy; but the mode of its financing, via indirect taxes on petroleum products, above all, which has pushed oil prices even above Rs 100 per liter in a large part of India, triggered inflation which harms mainly to the poor. If the government continues to chase after the wisp of seeking to revive the economy by crushing workers through indirect taxes, then the inflationary process will continue; but it would not achieve any economic stimulus.

Compare that with an alternative policy. Suppose the government spends a certain amount, say Rs100, as transfers to the poor. Since the poor consume more or less what they earn, all of this would be spent by them to buy goods and services. Assuming for simplicity that the capitalists consume nothing of their income at the margin, and that their share in production is half, the total demand generated in the economy through the different cycles of expenditure, through the multiplier, will be of Rs 200. This will also generate Rs 200 of additional production of goods and services, without any increase in prices (since there was spare capacity in the economy). By our assumption that the profit share is half, Rs 100 of this additional production will be the additional profits which, again by our assumption, will be saved.

Now, if the government taxes this extra Rs 100 of profit, then (i) there will be no increase in the budget deficit; (ii) there will be no increase in private wealth compared to the initial situation (since the additional savings that are added to wealth would have been taxed), and therefore no deterioration in the distribution of wealth ; (iii) there will be an improvement in the condition of workers, both because of the initial transfer and because of the increase in employment; and (iv) there will be no inflation due to this expansion program.

Thus, in contrast to the conservative economic policy which triggered inflation by worsening the situation of the workers, and in vain by the economic recovery, the alternative economic policy which transfers to workers by taxing the capitalists, achieves a recovery. without causing inflation. And since the tax on capitalists only takes away from them the additional profits that come to them, they would not be worse off than in the initial situation. The absurdity of conservative economic policy is now becoming clear, even to the capitalists, but not to the Modi government.