To Rebuild and Recover

Context: As India emerges out of the “relief” phase, the policy focus needs to shift towards the “rebuild” and “recover” phase, aiming at wider consumer base and direct spending accordingly.

State of Indian Economy

• The decline in Growth: in sharp contrast to the growth seen over the past 10-15 years when it was marked by three phases:
  • Pre-2008 phase - When growth was driven by domestic investment and global growth.
  • Post-global financial crisis stimulus phase
  • Leveraged consumption phase.
• Loss to the economy: is estimated to have cost around Rs 20-28 trillion due to a lockdown.

Issues with the Efficacy of Fiscal Stimulus

• Existence of Structural Demand Problem: India’s economic slowdown is largely a structural demand problem that cannot be addressed through aid and transfers.
  • Skewed Consumption: In urban India, the top 20% of the population accounted for nearly 55% of discretionary consumption and 45% of all consumption.
  • Narrow Consumption: The narrow consumption base, coupled with uncertainty over the demographic dividend, poses a risk to long-term investment attractiveness.
• Rise in Precautionary Savings: Temporary incomes coupled with job/income uncertainty will induce precautionary savings without any impact on growth.
• High Risk-reward ratio: Printing money or abandoning fiscal prudence stands risky; thus, rapid consolidation will adversely impact growth.
  • Due to high debt/GDP ratio: India’s public debt/Gross Domestic Product (GDP) will likely reach around 85% and
    • The consolidated gross fiscal deficit to GDP ratio could be around 12.5% this year.
  • Employment Issues:
    • Skewed Labour:
      • The Periodic Labour Force Survey (PLFS) 2018-19 report places around 24% of the workforce in the regular wage/salary category.
    • Lack of Social Security:
      • Within the formal cohort, around 40% do not have a written contract, paid leaves, or security, while 70% do not have any written contract.

Way Forward

• Focus on Inclusive growth: Around 50 of the rural non-agriculture workforce and 35 per cent of the urban workforce is engaged in the construction and manufacturing sectors.- PLFS Report.
  • Broaden consumer base beyond the top 10-20% of the population by creating steady and well-paid employment for the bottom and middle segments.
• Infrastructure and Manufacturing as the two pillars of public spending:
  • Since 50% of the rural non-agriculture workforce and 35% of the urban workforce is engaged in the construction and manufacturing sectors. – PLFS Report
    • Infrastructure: public spending should be directed towards sectors such as roads, railways, infrastructure, healthcare and educational facilities:
      • Promote infrastructure creation along with private sector participation,
      • Charge an economical price for goods and services such as power, irrigation, and public utilities,
      • Establish the rule of law with minimal interference in pricing, streamline processes for quick approvals.
      • Ensure timely payments to private operators.
      • Manufacturing: The government has been pushing for electronics manufacturing and import substitution in some sectors, focus need to be on -
      • Labour reforms,
      • Fewer/quicker approvals,
      • Reducing the compliance burden and
      • Promoting export-oriented sectors.
    • Ensure financing strategy through sharper expenditure management through setting up of a Development Financing Institution, asset monetisation programme and enhanced market borrowings like
      • Tax-free bonds for retail investors
      • External assistance from multilateral/bilateral agencies
      • Ultra-long-term bonds

Conclusion: Address problems related to infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles to achieve sustainable economic growth.