Can the Indian government engineer growth by spending more during slowdowns?

The desire to engineer prosperity is not new. We have seen it take many forms: the Soviet Union’s five-year plans, India’s own Planning Commission, and any number of industrial strategies in between. What they share is a belief that if the right people make the right decisions and push resources in the right direction, growth will follow. The 2008 financial crisis gave this instinct a new name — stimulus — and a new respectability. But the problem with engineering growth has not changed,. It is the same problem we explored in FAQ 8: no government can know what a market knows.

An economic slowdown is, at its core, a fall in demand. People and businesses spend less. Goods pile up, factories run below capacity, workers lose jobs. The government, watching this, tries to step in as a buyer of last resort. It builds roads, launches schemes, and increases spending. The idea is to keep the engine running until private demand recovers. The problem is that the government cannot know where to usefully spend. It does not have better information than the millions of households and businesses whose collective choices constitute the economy. And spending without that information tends toward the unproductive.

China’s response to the 2008 crisis is the clearest illustration. A stimulus of roughly $600 billion produced bridges, highways, and — notoriously — entire cities built for populations that never arrived. Ghost cities: real steel, real concrete, real labour, generating almost no lasting value. The spending was visible and impressive. The returns were not.

None of this is free. Government spending comes from taxes collected today or borrowing against taxes collected tomorrow. When the state crowds the room as a buyer, it takes money that would otherwise remain with citizens — available for consumption, savings, and investment that the citizens themselves would direct toward uses they actually value. A productive rupee, spent by a private actor who bears the consequences of getting it wrong, becomes a less productive rupee in the hands of a ministry that does not.

India has its own version of this trap. MGNREGA — which guarantees rural households a hundred days of government employment — was designed as a safety net for slowdowns. It has also become a permanent feature of the rural economy, keeping millions of people in low-productivity work at significant public expense.

So the short answer here is no, governments cannot reliably engineer growth by spending more during slowdowns. They can create the appearance of activity. They can delay the reckoning. But the engine of growth — private investment, entrepreneurial energy, productive employment – needs to be nurtured and cannot be replicated at will.