Is Keynesian advice relevant to India’s economy? Austerity, Keynes warned, could worsen an economic slump. If we all cut back on spending, output would reduce. But the economist was talking about an economy constrained by demand, not supply.
What Indians have been urged to buy less of is stuff that’s either hit by scarcity or using up too many dollars at a time of dollar deficiency. That’s reasonable. The picture could get blurry, though, if austerity takes a cue from cost-push inflation and gets generalized across diverse categories of consumption.
Deficient demand has been in evidence for long in many fields. With real incomes flat or weakly inclined among the bulk of wage-earners, many consumer-facing businesses have struggled to expand markets, even though product penetration levels remain low.
This could partly explain tardy private investment and slow capacity expansion, although last year’s GST relief has spurred big-ticket purchases and could play out elsewhere too.
What must not occur is a general slowdown in retail spending. If aggregate demand slows down, India’s economy may be saddled with the paradox of thrift that Keynes cautioned us against.