Thursday, November 27, 2008

Infrastructure creation and job creation; a debate

I try to answer below questions from two of our readers in the shout-box. Their questions are excerpted below for ready reference:

27 Nov 08, 15:19
Ashish: Pardon me Sir, but how does public expenditure in infrastructure will generate demand, apart from creating some job opportunities. What r the other constituents of demand generation, apart from jobs.

Mayank: He was discussing about the negative side effects of job creation in government sector and preferred government's financing private sector infrastructure creation for job creation.

My response:

It is more about creating jobs at the lowest level. The casual labourer, the low wage earner and small time employee. If about Rs. 50,000 crore is being spent on creating infrastructure, a substantial portion of it will go towards creation of such jobs directly. Then there is the indirect job creation because of the material being used, the operation of the infrastructure etc. This will lead to further creation of jobs and assets. That is how a virtuous cycle of creating demand can be commenced. More jobs means more money in the hands of large number of people. That means their spending for consumption. That will in turn create more demand for goods and services and in turn lead to further creation of jobs. Hope you can get the concept. The question is much more about creation of jobs; it is less about creating it in public sector or private sector. What we meant by 'government spending' was in the context of reports that the government is thinking of boosting invetment infrastructure by encouraging private investment i.e., largely through giving loans from the government coffers to business houses in the context of tightening liquidity conditions. Instead of that if the government spends directly on infrastructure creation, that will have a direct impact on job creation across various levels.

Whatever increases general consumption from the people is what leads to demand generation. This can include keeping more money in the hands of the people or lowering the prices of goods and services. Keeping more money in the hands of people can be achieved by, apart from employment generation, lowering taxes -- both direct and indirect and also by strengthening currency so that the same amount of currency can buy more goods and services. Lowering of prices can be achieved by deflation, lowering inflation, lowering indirect taxes and by strengthening currency.

Hope it clarified something for you.