In a standard course in Economics, growth and development are typically taught from a macroeconomics perspective. At the same time, microeconomics focuses on individuals' choices, whether as consumers or producers. As a result of this dichotomy, when expert advice on growth and development is needed for policymaking, one typically turns to the macroeconomists. However, there is no objective basis for why such a dichotomy exists; after all, the primary focus should be on the growth and development of the individual or the choices individuals make to grow and develop. Macroeconomists understand this dilemma and make desperate attempts to provide a micro foundation by constructing a hypothetical representative agent who might or might not bear any resemblance to a real person or an individual. In my opinion, this dichotomy between the macro outlook and the micro perspective produces a subtle difference in the philosophical approach towards growth and development. In this regard, the policy approach of the UPA was distinctly different from that of the NDA under Prime Minister (PM) Modi. The UPA had a macro approach to growth and development, with greater emphasis on the aggregate numbers. In comparison, the NDA under PM Modi focused much more on micro-revolutions with greater emphasis on implementation so that basic infrastructure such as digital technology, toilets, roads, houses, bank accounts, LPG, water, etc., reached all, irrespective of socio-economic status, religious beliefs or diverse geographies. The emphasis of the NDA under PM Modi was not limited to how much the government is spending in the aggregate sense but on whether it is reaching the intended individual beneficiaries.
This philosophical difference in approach was reflected in the debate in the upper house of the Parliament when the former Finance Minister of the UPA, who perhaps represents the intelligentsia of the UPA, mocked Prime Minister Modi's digital payment infrastructure plan to take it to the lowest sections of the society. He believed such an ambitious plan would be a spectacular failure, an unnecessary waste of scarce resources. Given that his thinking was primarily macro with a limited capacity to think in micro details, he could not envision (a) that such an ambitious plan could be implemented on the ground and (b) that it would readily be accepted and adopted by the most ordinary citizens. While focusing on aggregate expenditures, he was blinded to the transformative nature of the micro-revolutions unleashed at the individual's level. In less than five years, India's digital public infrastructure, including digital payments and direct benefit transfers, is considered a "logistical marvel" worldwide. The macro approach of the UPA to growth and development with a focus on aggregate numbers starkly contrasts with the micro and individualistic approach to the growth and development of the NDA under PM Modi.
In the next part of the essay, I provide additional examples highlighting the difference between macro and micro perspectives on growth and development.
In a standard microeconomic framework, wages are directly proportional to the marginal productivity of labour, which measures the incremental increase in output from a one-unit increase in labour. The more productive the labour, the higher the wages. However, if labour is subjected to diminishing returns, with further increases in labour, output grows, but at a lesser rate; in other words, with additional units of labour, the marginal productivity of the labour would fall, and therefore, the wages would be lower if more and more people can do the same job. Hence, wages reflect the value in exchange (and not the value in use) and would largely depend on how scarce the labour is. It is crucial to bear in mind that in such a framework, there is no virtue signalling in higher wages. If households want to raise their wage and improve their standard of living, they would have to invest resources in activities that increase their productivity. One possible way for the household to achieve this would be investments in health and education. Therefore, from a micro perspective, household expenditure on health and education is an investment, not consumption. However, from a macro perspective, health and education are not considered economic investment expenditures but consumption expenditures.
Second, if we look at some of the flagship programmes of the government, such as the PM Jan Arogya Program, which is perhaps the world's most extensive health insurance programme, the macro perspective of the programme would limit itself to the aggregate health expenditure, while the micro perspective focuses on the reduction in the health-related precautionary motive to save and therefore, leading all households (whether they avail the insurance or not) to increase their consumption expenditure, which in turn increases aggregate consumption and hence, higher output.
A more general lesson from this would be that if there is an improvement in economic conditions with higher economic security, households' incentives for precautionary savings are reduced, which could, in the aggregate sense, be reflected in the decline of aggregate household savings to GDP ratio. A macro perspective, fixated on indicators such as household savings to the GDP ratio, would not be able to capture this nuance, which would only be possible with a micro perspective.
Third, if we look at the PM Awas Yojana, whose aim was the provision of subsidized pucca housing to the economically weaker sections of society, a remarkable and noteworthy feature of the scheme was that to avail its benefits, female head of the family had to be the owner or co-owner. From a macro perspective, this would be considered a targeted fiscal expenditure; however, from a micro perspective, this scheme is about (a) women empowerment within the household, (b) wealth creation for the economically weaker section of the society in terms of housing, and (c) with access to immovable assets, it would help the economically marginalized households to avail the benefits of the formal banking sector.
In conclusion, the macro approach to growth and development is relatively simple; their primary focus on government is from the perspective of fiscal expenditure. A rupee spent by the government is merely a rupee spent. They pay very little attention to the details of the government program in terms of design and implementation and its impact on the lives of the individual. In sharp contrast, the micro approach, focusing on individual growth and development, has to go beyond the expenditure and pay close attention to the nature of the government programme and its implementation. A micro approach compels policymakers to think about opportunity cost, in other words, the different options available to the government and where the resources could be spent with the most significant impact on individual upliftment.
When one closely looks at the different government schemes launched or implemented by the NDA under PM Modi, greater emphasis has been placed on their impact on individual growth and development. Subsequently, the design and implementation of government schemes are as important as, if not more than, mere budgetary outlays. This sharply contrasted with the UPA, where a greater emphasis was on aggregate expenditure, with limited attention on the micro details of design and the implementation of the government programme.
(Professor Shamika Ravi is Member of the Economic Advisory Council to the Prime Minister. This article is an individual viewpoint and does not reflect the stance of the EAC-PM.)
Views are personal, and do not represent the stand of this publication.
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