Say’s Law works: Supply does create its own demand

News: Supply-based interventions can help in increasing demand and thereby have a positive impact on the economy. That is why they are a popular public-policy choice.

What is “Says law”?

It says supply creates its own demand. However, John M. Keynes has refuted “Say’s Law”. According to Keynes, say’s law was the only major tenet of classical economics. Also, it is different from Keynes approach which suggested the usual gap filing by State.

Why supply-side interventions are significant?

One, to optimize state expenditure and maximize its benefits across sectors, as developing countries have limited fiscal resources.

Two, budget allocations require more thinking and have a multiplier effect on the economy. For example, according to the Reserve Bank of India report (2019), infrastructure spending has a multiplier ratio of 3.25.

Three, it increases production capacity and demand. That’s why a measured approach to developing an enabling base for the economy has been at the core of strategy for all countries.

Four, it pushes the economy into a virtuous cycle of mutually-reinforcing supply and demand. It helps in nudging supply that generates jobs, boosts incomes, and creates demand.

Five, infrastructure plays an important role in times of economic disruption and transition. According to Crisil, India’s central Capex grew 31% this year, and if the trend continues, it will exceed by 12% the pre-pandemic trend level.

How India’s focus on infrastructure reinforces Say’s law?

First, infrastructure received attention for the first time in the Sixth Five-Year Plan (1980-85) and continued to be a crucial component of all budgets. Its share has increased both in terms of budget allocation and policy focus.

Second, the government has made financial commitments through production-linked incentive (PLI) schemes as well as the “Panchamrit Commitments” at CoP-21. India has also announced ₹111 trillion National Infrastructure Pipeline (NIP) in 2019 for a six-year period.

The schemes aim to develop a cutting-edge and adaptive infrastructure base to boost India’s growth engine. Along with this, it will also help in manage climate change.

How Say’s law is followed by other countries?

 One, developing and developed countries are taking the same fiscal path of supply-based expansion to meet their economic objectives.

China has focused on investing in infrastructure to revive its economy whenever there are signs of slowdown. For US infrastructure plan has both geo-strategic element and a tool fight covid economic crisis.

Two, not only for India but infrastructure spending is significant for other countries also. For instance, China spent $8 trillion in 2020 and the US is in the process of getting approval for its Build Back Better bill, which aims for advanced infrastructure.

What is the way forward?

First, a detailed scrutiny is needed to understand the importance of an initial supply push and its impact.

Second, acknowledge supply and demand move in an interlinked cycle and this should support further policy responses.

Source: This post is based on the article “Say’s Law works: Supply does create its own demand” published in Livemint on 21^st Jan 2022.