In an interview around the time the National Statistical Office said that the economy had grown at only 1.6% in January-March quarter, Finance Minister Nirmala Sitharaman asserted that all that sufficient measures had already been taken to restore growth in the proposals under Union Budget 2021-’22 and three tranches under the Atmanirbhar Bharat.

On Monday, this was topped up by new measures to support the economy, This time there was a focus on the healthcare and tourism sectors.

There can be no room for complacency.

First, there has been a secular decline in growth since the first quarter of 2018-’19. Gross domestic product 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-’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. Lockdown to contain Covid-19 has led to massive job losses due to the closure of various commercial and industrial as also all contact service establishments including Micro, Small and Medium Enterprises.

The Centre for Monitoring Indian Economy estimated job loss at around 50 lakh by March 2020. A recent estimate on June 17 has put job loss at 2.53 crore 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.

Falling wages, rising inequality

Third, a study, State of Working India 2021: One year of Covid-19 by Azim Premji University has brought out that 23 crore individuals have fallen below the national minimum wage of Rs 375 as recommended by the Anoop Satpathy Committee. This means an increase of the income poverty rate by 15% in rural areas and nearly 20% 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, a coalition of civil society organisations that have come together to respond to the pandemic.

Fourth, as is widely recognised, the Indian economy is highly unequal. As per the World Inequality Database, the share of the top 10% in India’s national income was 56%, much higher than that in comparable countries like Indonesia (41%), Vietnam (42%) and even China (41%). A 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 6.6 crore from 9.9 crore.

For all the above, the 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 clearly suggests that the Indian economy is suffering 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 the productivity of the economy that is required for sustainable growth.

Atmanirbhar Bharat package

Indeed, the government, on May 13, 2020, May 17, 2020, October 12, 2020, and November 12, 2020, proposed several schemes providing for Rs 29.87-lakh crore to mitigate the devastating impact of the Covid-19 pandemic under the Atmanirbhar Bharat package. The package was equivalent to about 16% of India’s GDP.

However, the total fiscal outlay was estimated at only about Rs 3-lakh crore or 1.5% of GDP. A large part of the stimulus measures was 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 help them cope with the loss due to sudden shutdown of economic activities.

Budget 2020-’21 also provided for a huge allocation of Rs 5.54-lakh crore for infrastructural projects with the objective to create jobs which in turn would promote consumption that could drive growth.

Starting from a 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 recognising the fact that the second wave of Covid-19 has further exacerbated growth prospect, four quarters following the stimulus package have not witnessed significant growth.

It means that the economy requires a very big demand push for growth recovery. Scheme of the following type, in addition to what the Centre has already introduced, would give demand push for growth recovery:

1. Release of the three instalments of dearness allowance to the central government employees amounting to around Rs 37,500 crore in the form of expenditure voucher could be considered.
2.   A total of 1,737 Central sector projects (including delayed projects) costing Rs 150 crore and above with about Rs-26.71 lakh core anticipated completion cost (425th Flash Report by Ministry of Statistics and Programme Implementation) and those proposed in Budget 2020-’21 should be executed on a fast-track basis.  
3.   Households steeped into indebtedness due to Covid-19 hospitalisation should be given full relief of the burden.  
4.   Households that have lost earning member should be provided with a basic income of Rs 5,000 per month.  
5.   Migrant labours who have lost jobs should be given a basic income of Rs 5,000 per month for six months.  
6.   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.  

Managing expenses

Clearly, the implementation of such schemes that would put money in the hands of the people would need a large expansion of government expenditure that would stress the fiscal deficit. But then windfall gain from petroleum, oil and lubricants taxes, massive Reserve Bank of India transfers and an unexpectedly large increase in income tax revenue in the current year would provide considerable cushion for a possible spike in government expenditure.

The reallocation of Budget allocations under different heads depending on the urgency under the current situation as also the mobilisation 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.

Source: scroll.in, 29 June 2021