Stimulus 2.0 expected by September-October: To likely focus on employment guarantee for urban poor

Many labour-intensive sectors, with higher levels of inter-state migrant dependency like manufacturing, mining, retail trade, etc are already facing difficulties due to labour shortage.

The next round of stimulus, expected by September-October, will likely focus on the infrastructure and construction sectors, and may include an employment scheme for the urban poor on the lines of the Mahatma Gandhi National Rural Employment Guarantee Scheme, whose efficacy has been borne out again during the pandemic period.  While the budgetary cost of the fiscal stimulus announced so far — 1.4% of the GDP — has been more than offset by the expenditure curbs in other areas, the new tranche will also be similarly fiscally prudent — the part of it based on additional budgetary resources could be minimal, and most of the budgetary incentives to infrastructure and construction areas will be balanced by a spending rejig.

According to official sources, the new fiscal measures to reverse the sharp growth slide will spur discretionary spending that may start looking up on its own, once the pandemic curve start flattening.  Besides, investors in the infrastructure and construction sectors will be encouraged with some sops that may involve a budget cost. “The new measures may be a combination of tools to push consumption demand as well investment to boost job creation,” an official said.

The idea is also to encourage a section of urban migrant labourers, who have gone back to their rural homes, to return to urban centres. Many labour-intensive sectors, with higher levels of inter-state migrant dependency like manufacturing, mining, retail trade, etc are already facing difficulties due to labour shortage. The manufacturing sector (which employs 6.5 million inter-state migrants) and MSMEs in general will take a hit if large sections of migrant workers don’t return by the end of the September quarter, according to a study by India Ratings & Research.
The strategy is to keep the FY21 budget size roughly the same as the budgeted level of Rs 30.4 lakh crore (BE), which itself may require the fiscal deficit to widen to roughly 7% of the GDP, against the budgeted 3.5%, given the huge revenue shortage.

Officials from the finance ministry are brainstorming with their counterparts in other key ministries on the nitty-gritty of the new package. According to the RBI data, capacity utilisation level by industry had dropped to 68.6% in Q3FY20, way below the 75-80% benchmark for new capacity addition, implying suboptimal levels of fresh investments. Though data are not yet available, sources said capacity utilisation may have fallen to 50% or thereabouts in Q1FY21.

While the quantum of cash transfers by the government may not be enough to kick-start demand given these are limited by budget constraints, there is a debate on whether to infuse additional funds to increase public investment in the railway projects and in the scaling up of urban housing and construction. The sectors that shows high employment elasticity will get priority.

The government has been using the rural job guarantee scheme (MGNREGS) to avert a rural distress, in the wake of the return of lakhs of migrant labourers to the rural areas. The government has already increased the 2020-21 budget outlay for MGNREGS to `1,01,500 crore from an initial outlay of Rs 61,500 crore.

With more people getting work under MGNREGA, rural unemployment has fallen to 6.34% on the week ended July 12 from 7.78% in the previous week, according to the Centre for Monitoring Indian Economy. While this has addressed rural distress to some extent after mass reverse migration of people to their villages, officials think something similar has to be done for the urban poor to mitigate hardships of urban poor.

Unlike the rural job guarantee scheme, where most of the budget cost are attributable to wages, material component will be high in the urban scheme as most structures to be created under it will be durable. The Centre may draw inspiration for the similar urban schemes already in vogue in two states — Tripura and Odisha. While Tripura has been implementing the scheme well since 2009, the Odisha scheme was announced in April for a period of six months after Covid-19 broke out.

The urban MGNREGA will likely focus on labour-intensive works such as construction of drainage pipelines, toilets, water body creation and maintenance (like Yamuna cleaning), road construction in urban-villages, repairing of old roads, maintenance of public parks.

Till July 27, over 152 crore person (work) days have been created under the MGNREGS during the current fiscal, and this is more than half the ambitious revised target of 300 crore days set for the whole of the year, according to the official dashboard. In the April-July period of last fiscal, the person days created under the scheme were just 116 crore.

After the recent revision of the Centre’s borrowing programme, its fiscal deficit for FY21 stands at 5.7% of GDP, against budgeted 3.5%; however, the big decline in revenue will likely take the deficit to around 7% of GDP, even without any expenditure compression from the budgeted level.