Got to Sync All Differences

Context: Just as the economy shows signs of recovering sharply from two vicious waves of Covid-19, they have started fretting about the myriad factors that could hold back long-term growth.

Problems of India from the perspective of growth

• Inequality problem: Inequality limits the size of markets for goods and services. World Inequality Database shows that
  • In 1990, top10% of India’s population had 34.4% of the national income and in 2019, it was 57%. 
  • Bottom half’s share plummeted from 20.3% to 13% in that period (1990-2019).
• Inadequate employment: Current economic growth is loosely referred as ‘jobless growth’.
  • In the 1990s, a percentage growth in GDP led to 0.4% growth in employment. But, in the last decade, the corresponding increase in employment halved to 0.2%.
• Long-term decline in labour productivity: Growth depends not only on more workers being employed, but also on each worker producing more output in the same period of time. Various issue in measuring labour productivity(Output per work day or hour is a common measure):
  • Patchy varying estimates of  data on labour productivity. 
  • World Bank’s World Development Indicators point to a deceleration in labour productivity post 2016. 
  • Study by India Ratings, finds a continuous deceleration post 2004-08.
• More needs to be done in social sectors: Government has been accused of ‘growth-chasing’.But, better access to health and education enhances earnings and chips away at inequality.
• Fiscal sustainability issues-Inability of GoI to spend on social sector needs: Due to consolidated debt of the Centre and states estimated at 87% on the back of Covid-related expansion compared to an average of about 69% in the last decade. And,
  • Economists tend to raise their eyebrows when the government overborrows.
• Challenge in creating  meaningful fiscal space for social sector needs: As, getting debt down sharply could crimp much-needed social sector spends, unless GoI finds money through higher taxes or asset sales or cut unnecessary expenditures like food and fertiliser subsidies. But, aggressive chopping could actually worsen inequality.
• Policy uncertainty due to political expediency creating hard brake on growth potential: As, Tax policies can’t be radically changed on the basis of near-term fiscal needs, and sectoral reforms need to stay in place irrespective of which dispensation is in power.

Way forward: Sustained long-term growth contingent on growth creating more jobs and expanding the domestic consumption base.

• Indian fiscal choices have to be made between a rock and a hard place: Balance imposition of taxes on wealth — net wealth tax, estate tax, etc with supply of entrepreneurial effort.
• Towards policy certainty: By synchronising central and state elections to ensure that major national economic policies, do not fall prey to political compulsions of the never-ending cycle of polls.
• Ideal GoI responses: Conducive industrial policy that could incentivise employment-linked growth production-linked incentive (PLI) scheme.
• GoI could save costs by increasing number of subsidies targeted through the direct transfer route.
• Greening of the economy in response to the threat of climate change as it may create some bottlenecks in terms of energy availability.
• Creation of long-term infrastructure plan where Infrastructure creation is closely linked to construction that has the highest employment elasticity among major sectors.

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