Nawab of Oudh, Keynes and lessons for the Union Budget

Rudra Sensarma

The news of direct tax collection jumping by 18.2 percent in April-December would bring some relief to the Finance Minister as he faces the twin challenges of growth revival and fiscal consolidation in his budget proposals. The government is in an infrastructure overdrive starting with the last union budget making a massive allocation of Rs 3.96 lakh crore towards infrastructure (almost twice the previous year’s amount) out of which Rs 2.41 lakh crore was for transport sectors alone. This was followed by some high profile project launches such as the Rs 1.1 lakh crore bullet train in September and the Rs 7 lakh crore Bharatmala highway project in October. With the economy not out of the woods yet and job growth a priority, it is important to continue this focus on infrastructure by launching more big bang infrastructure projects this year.

How will an increase in public investment help to turn the fortunes of the economy? I am reminded of a story I narrate in Macroeconomics class ever since I started teaching thirteen years back. In 1784, the Nawab of Oudh (or Awadh, as Lucknow was known then), Asaf-ud-Daula, faced the challenge of reviving employment and economic growth in the aftermath of a devastating famine. He commissioned the Bara Imambara – a monument of limited practical use – where thousands of construction workers found employment and large orders for equipment and materials were placed. The public exchequer was used to pay the men and suppliers a market rate. It is quite likely that the project spawned several sceptics. What use is such an elite project to the common person? Should such huge amounts of money be wasted in times of economic distress? Why not use the same money for health and education?

But Asaf-ud-Daula went one step further and employed noblemen (the middle classes) to come at night and destroy what was built during the day. They were suitably compensated for their efforts. Reasons for this seemingly odd nocturnal activity vary. The noblemen were jobless too and so were employed for the only work they knew. The cover of darkness protected their dignity as they did not want to be publicly seen during daytime engaged in manual work. Or perhaps the good Nawab simply wanted to prolong the project beyond its planned schedule to keep people employed for a longer time. The project eventually got completed in 1791 (clearly the speed of construction exceeded the pace of destruction). By then the Imambara had fulfilled its real objective – not of being the grandest building in Oudh but to boost the economy and bring prosperity to the region.

It is not only the men and material directly engaged with the project that created this economic impact. Each worker who was paid by the Nawab spent it on things he needed. Be it on food, clothing or recreational activity, every spending in turn generated another earning (for the producer of the goods sold to the workers) thereby triggering a sequence of economic activities. At each step of the sequence, some employment was created, income was earned and GDP increased.

There are numerous examples in Indian history of similar projects such as the Umaid Bhavan palace (Jodhpur), the Hari Parbat fort (Srinagar) and the Madhav Sagar pond (in Sikar) that were undertaken to ‘pump prime the economy’. The most known global example is from depression-era United States (1930s) when President Roosevelt used the federal budget to build several bridges, reservoirs, parks and playgrounds. This was under the intellectual influence of the British economist John Maynard Keynes (who had earlier worked in the India office of the British government and had written extensively on Indian economic problems). That is how such policies came to be named after Keynes and today we refer to them as the Keynesian multiplier effect of public investments.

Keynesian policies in India in the recent past include the golden quadrilateral project launched in 2001 and the NREGS initiated in 2005. While each project would have a proclaimed purpose, there are multi-fold benefits to the economy through various forward and backward linkages. Take the case of the bullet train. Its route runs through 3 states that would receive an enormous economic stimulus with multiplier benefits percolating across the country. Additionally, there will be transfer of Japanese technology to Indian component manufacturers and skill development of Indian engineers that would find use in other high-tech applications. The four-laning of highways under Bharatmala, along with the Sagarmala project of ports and coastal development, will give a fillip to domestic and international trade. As many as 44 economic corridors are expected to be created with 14.2 crore man days of jobs generated in the states through which the roads pass.

The projects need not hurt the exchequer. For instance the bullet train is funded by a Japanese loan at generous terms and Bharatmala is funded through a mix of market borrowing, cess and toll collections, asset monetisation and private investment. Fiscal space can also be created in the budget by using the demonetisation and GST driven growth in tax collection, higher disinvestment targets and by further rationalising subsidies. Without compromising on fiscal consolidation and through the use of innovating financing options, the 2018 budget proposals should include at least ten big bang projects in roads, railways, ports and other rural and urban infrastructure sectors. The economic gains from projects such as the bullet train are not just short term by means of job creation and demand boost during the project implementation phase but also long term through higher productivity and tax revenues. Will the FM bite the bullet?

(Dr Rudra Sensarma is Professor of Economics at the Indian Institute of Management Kozhikode. The views expressed in this piece are his own.)