PremiumMonetary policy has done its bit and fiscal policy can’t continue to shy away from the responsibility it must bear for effecting an economic revival that would benefit a vast majority of India
| Listen to this article |
The third wave of the pandemic may be slowly receding, with declining covid infections, but the impact of the pandemic on the economy may last longer than expected. A lot will depend on the response of the government in dealing with the pandemic-induced disruptions. It is clear from a number of nationally-representative surveys that India’s economy is not only suffering a growth slowdown, this has had highly varied effects on various sections of our population.
Recent findings by the ICE360 Survey 2021, conducted by think-tank People’s Research on India’s Consumer Economy, reveal a decline in income of the bottom 20% of the population by 53% between 2015-16 and 2020-21, as against an increase of 39% for the richest 20%. These results are not surprising. In fact, they confirm similar data from several other surveys and nationally-representative estimates of wages and employment made officially by government agencies. Given that our economy was already in a sharp slowdown before the pandemic struck, the urgency to revive it is not just an economic necessity, but also a social and political imperative.
The difference in fortunes of those at the two ends of our wide spectrum of income distribution is a matter of concern from the perspective of inequality in the country. But it is also central to any attempt at reviving the economy. Disruptions caused by government policies and the pandemic have only exacerbated a crisis of income for a majority of our population. With the real wages of casual workers, who account for almost one-third of all workers, having shown a decline over the last five years, the claim of declining incomes for the bottom 40% of the population is no longer a mere statistical artefact, but a harsh reality. Indian farmers also witnessed a decline in real incomes from crop cultivation, as reported by a recently-released survey of cultivators by the National Statistical Office. The recently-released advance estimates of national income reconfirm the severity of the economic situation, with private consumption in the country still lagging even its 2018-19 level in real terms.
Despite the evidence, the policy response has shied away from using the fiscal route to drive a revival of economic growth, with monetary policy shouldering the larger part of the burden. Unfortunately, with rising global inflation and the resultant prospect of easy-money policies being tightened soon in the developed world, monetary policy in India is unlikely to play the pandemic role it was assigned. But there is also a second reason for fiscal policy to take centre stage. The experience so far suggests that our current approach has had limited success in reviving economic growth. The fact that private investment has failed to revive and consumption demand also continues to show signs of weakness is not accidental, but a result of a flawed understanding of our economic reality.
The euphoria seen lately around an economic recovery based on encouraging tax collections is nothing but a reflection of inequality and consumption largely by the rich. Not only has it led to false readings of an economic recovery, rising incomes of the rich have failed to revive the ‘animal spirits’ of the economy, if judged by trends in private investment. Various tax sops and exemptions, which have mostly benefited India’s better-off, have only widened the wealth and income divide, even while failing to make any positive impact on the real economy.
Recent estimates are as much an eye-opener to our growing inequality and the differential burden of adjustment borne by different segments to a range of policy-induced and natural shocks to the economy, as they are a timely reminder to change the country’s existing policy regime.
The unwavering belief of our policymakers in investment-led growth financed by the savings of the rich in a demand-constrained economy has not led to any substantial recovery. On the contrary, it has contributed to an income squeeze for the majority. With capacity utilization barely above 60%, an investment push is unlikely to help. It is consumption demand that is the real challenge.
While it is clear that the upcoming budget and subsequent policy actions of the government should focus on reviving consumption demand on a priority basis, such a policy is likely to succeed only if it is broad-based and leads to an increase in the disposable income of the bottom half of India. With inflation likely to erode their purchasing power even further , merely protecting real incomes is not enough. The budget needs to go further and ensure that real incomes increase.
Fortunately, the success of various government programmes, such as the rural employment guarantee scheme, National Food Security Act provisions and various income-transfer initiatives, apart from pension schemes, has ensured a leakage-proof delivery mechanism that can be activated to ensure the delivery of benefits provided for by government expenditure to the country’s poor and vulnerable. The Centre is also likely to be in a fortunate position on revenues, with its fiscal health expected to improve, thanks to higher nominal growth. Public expenditure, therefore, needs to be expanded for broad-based spending on social protection and basic infrastructure. This is not just a sure way of reviving the economy, it’s the only way of doing it, regardless of the fiscal cost it would entail.
Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi
Never miss a story! Stay connected and informed with Mint. Download our App Now!!