Centre must spend to help economic revival
If there is an increase in the fiscal deficit, it is a lesser evil than plummeting or stagnant growth
- New Delhi |
Written by Atul Sarma and Shyam Sunder
In an interview around the release of the fourth-quarter growth figures for 2020-21 by the NSO, the Finance Minister asserted that all that needs to be done to restore growth has already been done in terms of the proposals under Union Budget 2021-22 and the three tranches of support under Atmanirbhar Bharat.
Such complacency underrates several facts. First, there has been a secular decline in growth since the first quarter of 2018-19. GDP growth declined from 7.1 per cent during the first quarter of 2018-19 (even prior to Covid-19) to 1.6 per cent during the fourth quarter of 2020-21, leaving aside the negative growth of the first (-24.4 per cent) and the second (-7.4 per cent) quarters of 2020-21. With declining growth, per capita income slumped to Rs 99,694 in 2020-21 from Rs 1,00,268 in 2017-18. In fact, India’s per capita GDP is now what it used to be in 2016-17 — the year when the slide started.
Second, Covid-19 has severely impacted not only GDP growth but also several other macro aggregates that have caused a huge demand deficiency. Lockdowns to contain the virus have led to massive job losses, including in MSMEs. The Centre for Monitoring Indian Economy estimated job loss at around 5 million by March 2020. Recent estimates (June 17) put job loss at 25.3 million since January 2021. The 30-day moving average unemployment rate as of June 6 stood at 13 per cent as compared to 5.5 per cent in June 2018. The labour participation rate has fallen to 39.7 per cent in June 2021 from 42.9 per cent in June 2018.
Fourth, as is widely recognised, the Indian economy is highly unequal. As per the World Inequality Database (WID), the share of the top 10 per cent in India’s national income was 56 per cent, much higher than that in comparable countries like Indonesia (41 per cent), Vietnam (42 per cent) and even China (41 per cent). A study by Azim Premji University has found that in April and May 2020, the poorest 20 per cent of the households lost their entire incomes, while the richer households lost less than a quarter of their pre-pandemic incomes. With falling income across the board, household consumption has plunged. Obviously, the recovery among poorer households would be slower because they were forced to sell productive assets and/or borrow to survive the crisis.
Further, Pew Research Centre has reported that the first wave of Covid-19 has witnessed a shrinkage of India’s middle class.
Private consumption as a proportion of GDP at constant prices has plummeted to 55.4 in the fourth quarter of 2020-21 from 56.2 during the first quarter of 2018-19. Private consumption has been the major driver of India’s GDP.
All this suggests that the Indian economy suffers from a huge demand deficiency. Its immediate turning around critically depends on a demand push. However, policy instruments to provide an immediate demand push could also be combined with policy measures that contribute to raising the productivity of the economy, needed for sustainable growth.
Indeed, the government proposed on May 13-17, October 12 and November 12, 2020, under Atmanirbhar Bharat package, several schemes providing for Rs 29.87 trillion to mitigate the devastating impact of the COVID-19 pandemic. The package was equivalent to about 16 per cent of India’s GDP. However, the total fiscal outgo was estimated at only about Rs 3.0 trillion or 1.5 per cent of GDP. A large part of the stimulus measures was quasi-fiscal with partial or zero outgo. The fiscal outgo was directed towards helping the poor and vulnerable sections including migrant workers, farmers, the rural population, agriculture and allied services, MSMEs and senior citizens with a view to helping them to cope with the loss due to sudden shut down of economic activity.
Budget 2020-21 also provided for a huge allocation of Rs 5.54 lakh crore for infrastructure projects intending to create jobs.
Starting with the drastic cut in corporate tax before Budget 2020-21, the majority of the stimulus schemes under Atmanirbhar Bharat were intended to stimulate private investment. In the face of falling demand, the response is sluggish except for the health and pharmaceutical-related sectors.
However, while recognising the fact that the second wave further dented growth prospects, the four quarters following the stimulus package have not witnessed significant growth. Schemes of the following types, in addition to what the Government of India has already introduced, would provide a demand push.
One, release the three instalments of DA to the central government employees amounting to around Rs 37,500 crore in the form of an expenditure voucher. Two, health infrastructure and services, which are labour intensive, should be expanded covering the tier 3, 2 and 1 towns and rural areas.
Three, 1,737 central projects (including delayed projects) costing Rs 150 crore and above and those proposed in Budget 2020-21 should be executed on a fast-track basis. Four, Households steeped into indebtedness due to COVID -19 hospitalisation should be given full relief of the burden.
Five, households that have lost an earning member should be provided with a basic income of Rs 5,000 per month. Six, migrant labourers who have lost jobs should be given a basic income of Rs 5,000 per month for six months. Seven urban micro-entrepreneurs and daily wage earners who have lost their livelihood should be given a basic income of Rs 5,000 per month for four to six months. Similar schemes inducing private consumption could also be thought of.
Clearly, the implementation of such schemes, which would put money in the hands of the people, needs a large expansion of government expenditure that would stress the fiscal deficit. But the windfall gain from petroleum, and oil taxes, massive RBI transfers, the unexpectedly large increase in income tax revenue in the current year, would provide considerable cushion for the possible spike in government expenditure. Reallocation of budget allocations under different heads, depending on the urgency under the current situation, as also the mobilisation of huge undisputed tax arrears could help. Despite all this, if there is a slippage in the fiscal deficit, it is a lesser evil than plummeting or stagnant growth.
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