On Restoring Growth of Indian Economy | Sarma & Sunder

by Atul Sarma & Shyam Sunder*

In one of her interviews with the media around the release of the fourth quarter growth of 2020-21 at 1.6% by the NSO, the Finance Minister asserted that all that need to be done for restoring growth has already been done in terms of budget proposals under Union Budget 2021-22 and three tranches 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% during the first quarter of 2018-19 (even prior to COVID-19) to 1.6 % during the fourth quarter of 2020-21 leaving aside the negative growth of the first (-24.4%) and the second (-7.4%) quarters of 2020-21. With declining growth, the per capita income slumped to the level of Rs 99,694 in 2020-21from Rs 10,0268 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. Lockdown to contain COVID-19 has led to massive job losses due to closure of various commercial and industrial as also all contact service establishments including MSMEs. Centre for Monitoring Indian Economy estimated job loss at around 5 million by March 2020. Recent estimate (June 17) has put job loss at 25.3 million since January 2021. The 30 day moving average unemployment rate as of June 6 stood at 13% as compared to 5.5% in June 2018. The labour participation rate has fallen to 39.7 % in June 2021 from 42.9% in June 2018.

Third, a study, ‘State of Working India 2021: One year of COVID-19’ by Azim Premji University has brought out that 230 million individuals have fallen below the national minimum wage of Rs 375 as recommended by Anoop Satpathy Committee. This means an increase of the income poverty rate by 15% in rural areas and nearly 20 percent in urban areas. What is more, while coping with the distress that COVID-19 unleashed a large number of families has fallen into indebtedness and made distress sale of assets; many families were forced even to reduce food intake leading to nutritional distress as evidenced by the survey conducted by Rapid Rural Community Response to COVID-19 (RCRC), a coalition of civil society organisations that have come together to respond to pandemic.

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). Study by Azim Premji university has found that in April and May 2020 the poorest 20 % 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 necessarily plunged. Obviously, the recovery among poorer households would be slower because they were forced to sell productive assets and/or to 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 which has the capacity to consume and save to 66 million from 99 million.

For all the above, the private consumption as 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 clearly suggests that the Indian economy suffers from a huge demand deficiency. Its immediate turning around therefore critically depends on demand push. However, policy instruments to provide immediate demand push could also be combined with policy measures that would contribute to raising productivity of the economy which is required 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% of India’s GDP. However, the total fiscal outgo was estimated at only about Rs 3.0 trillion or 1.5% of GDP. A large part of the stimulus measures were quasi-fiscal in nature with partial or zero outgo. The fiscal outgo was directed towards helping the poor and vulnerable sections including migrant workers, farmers, rural population, agriculture and allied services, MSMEs and senior citizens of the society, 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 huge allocation of Rs 5.54 lac crores for infrastructural projects with the objective to create jobs which in turn would promote consumption that could drive growth.

Starting from drastic cut in corporation tax prior to budget to 2020-21, the majority of the stimulus schemes under the 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 recognizing the fact that the second wave of COVID-19 has further exacerbated growth prospect, four quarters following the stimulus package have not witnessed a significant growth. It means that the economy requires very big demand push for growth recovery. Scheme of the following type in addition to what the Government of India has already introduced would give demand push for growth recovery.

1. Release of the three instalments of DA to the central government employees amounting to around Rs 37,500 crore in the form of expenditure voucher could be considered.
2. Health infrastructure and services which are labour intensive in nature should be expanded covering the tier 3,2 and 1 towns and rural areas.
3. 1,737 number of Central sector projects (including delayed projects) costing 150 crore and above with about Rs 26.71 lac core anticipated completion cost (425th Flash Report by MoSPI, April 2021) and those proposed in Budget 2020-21 should be executed on fast track basis .
4. Households steeped into indebtedness due to COVID -19 hospitalisation should be given full relief of the burden.
5. Households that have lost earning member should be provided a basic income of Rs 5000 per month.
6. Migrant labours who have lost jobs should be given basic income of Rs 5000 per month for six months.
7. Urban micro entrepreneurs and daily wage earners who have lost their livelihood should be given a basic income of ₹ 5000 per month for four to six months. Similar schemes inducing private consumption could also be thought of.

Clearly, implementation of such schemes which would put money in the hands of the people would need large expansion of government expenditure that would stress fiscal deficit. But then windfall gain from Petroleum, Oil, and Lubricants taxes, massive RBI transfers, unexpectedly large increase in income tax revenue in the current year would provide considerable cushion for possible spike in government expenditure. Reallocation of budget allocations under different heads depending on the urgency under the current situation as also mobilization of the huge undisputed tax arrears could also be thought of. Despite all this, if there is a slippage of fiscal deficit, it is a lesser evil than plummeting or stagnant growth.

* (Authors: Atul Sarma is Distinguished Professor at CSD, New Delhi and Shyam Sunder is working with an Indian Corporate. Views are personal.)