With poor competitiveness and a slowing world economy, Indian goods and services are not expected to win new overseas customers
Hastening economic recovery has now clearly taken centre stage, courtesy Union finance minister Nirmala Sitharaman. Since Independence Day 2019, the FM has periodically announced a slew of fiscal and financial measures aimed at revving up the economy. Most importantly, she has since willingly acknowledged the prevailing economic slowdown, and has explained, in various public settings, the purpose and scope of governmental interventions. Prior to this, authorities at the Centre, especially spokespersons of the ruling party and senior office holders of NITI Aayog, had gone overboard denying any economic deceleration, let alone discussing potential solutions and approaches to pull the economy out of the morass it has visibly slipped into.
While the relief measures are likely to have an impact in the long term, they seem unlikely to have any immediate effect. The tax related concessions, including lowering the corporate tax rates from 30% to 20%, and those for new companies from 25% to 15%, should result in greater investments, but only after they first cause greater economic activity. Increasing the depreciation rate from 15% to 30% pa for motor vehicles purchased during the current financial year is unlikely to lead to higher car sales until the primary causes of inventory build-up—rising vehicle-prices and unavailability of auto-finance options—are first addressed.
Similarly, an alternative investment fund for troubled real estate projects, or moves to partially cover lenders of funds to struggling NBFCs, are both well-meaning attempts, but would not quickly boost demand or grow consumption—two factors primarily responsible for prevailing conditions.
With capacity utilisation in most manufacturing firms hovering around 70%, and projected to continue to move downwards with IIP and core industries’ persistent decline, investment in industrial activity, especially in electrical power, remains stalled. Only an appreciable and sustained pick-up in demand—one not merely due to higher festive season sales—will see manufacturers, infrastructure developers, and service providers undertake expansion or diversification. Hopefully, the government and RBI would also have, in parallel, addressed a few of the banking sector’s NPA-related woes.
What is of utmost necessity is building up aggregate demand. With poor competitiveness and a slowing world economy, Indian goods and services are not expected to win new overseas customers. In a domestic-driven economy like ours, the answers have to be found within, and the process of amelioration must begin in our vast rural geography.
There has been a fall of 8.8% in per capita rural spend between 2011-12 and 2017-18 as per a leaked NSO Consumption Expenditure Survey. Similarly, an Azim Premji University paper shows agricultural jobs falling by 27million, or 11.9%, in this period; and, rural youth seeking unskilled jobs in MGNREGA is increasing. In 2018-19, agriculture growth itself had declined to a measly 2%. This impacts the well-being of two-thirds of Indians, who live in rural areas. Declining sale of FMCGs, white goods, two wheelers, and tractors, clearly indicate lowering rural disposable incomes. Despite good rains this year, benefits to farmers would be marginal unless MSP for rabi crops is substantially raised.
Additional liquidity could be pumped into the rural economy through the tried and tested MGNREGA scheme, for which 8.5 crore job-seekers stand registered. Their wages could be raised in line with respective state minimum wages, and the restriction of giving work for 100 days annually temporarily raised to 200, with the limitation of one family member being employed also done away with. The allocated Rs 60,000 crore is fast depleting, and with the re-orientation proposed here, substantial additional funds and job-sites are required.
Other available platforms are the successful Gram Sadak Yojana (rural roads) and the Awas Yojana (rural housing). Like MGNREGA, these wages for work and asset-building schemes are not the typical Keynesian payments for digging holes and filling them up. While basic connectivity to nearby marketplaces may have been provided to several villages under PMGSY, only low hanging fruit has been plucked. Covering all 6.5 lakh villages, and making roads truly all-weather and wide enough to carry the load of tractors without pushing two-wheeler users off the roads remains. Scope for building more houses under PMAY is also considerable.
PM KISAN, too, is capable of greater usage, and can have quick impact on farmers, tenants, and landless labourers. Hitherto, only the first instalment of Rs 2,000 has reached 8 crore beneficiaries. The remaining two instalments, totalling Rs 4,000, could be released simultaneously during the current calendar year; next year, the total should be more substantive, perhaps doubled to Rs 12,000.
The MSP mechanism also needs a relook. Rather than just basic staples, the poor today seek more proteins and vitamins viz. pulses, vegetables, milk ,eggs, and fruits, and these need to be brought under MSP’s purview. With greater assured irrigation facilities today, compared to 40 years ago when the scheme was introduced, farmers’ cropping patterns have undergone changes; crops covered by the scheme need to be periodically reviewed to reflect contemporary preferences and priorities. More importantly, the government need not physically buy the produce—only paying the price differential between the assured and open market prices should suffice. The experience of the Bhavantar scheme in Madhya Pradesh could be used to devise the new programme.
The expensive PDS, too, needs drastic modifications. Instead of giving subsidised foodgrains to all 23 crore ration-card holders through a network of 5.4 lakh fair price shops, only those at the bottom end of the poverty line need be made eligible, and they too should be given the option between subsidised food and cash transfers. While effecting such structural reforms will need extensive stakeholder consultations, an immediate way to put more disposable income in the hands of the poor would be to enhance the subsidy as a one-time measure. Given last year’s procurement, FCI warehouses are carrying twice the quantum needed as buffer to stabilise open market prices.
The foregoing measures entail greater government expenditure, and there are apprehensions of the fiscal deficit exceeding the projected 3.3%. Recent inflows from RBI and the planned strategic sale of stakes in PSUs such as BPCL and Concor, would only make up for the short-fall compared to the projected tax revenue. Some fiscal space could, however, come from the ~1.5% of GDP locked up as excess appropriation of the budget, and only the remaining would need deficit financing. Yet, this proposed The additional spend outline here remains warranted as the aim is to hasten the process of economic recovery, which, in turn, would make tax revenue more buoyant.
The recent urgency shown by the government to introduce measures for economic recovery are undoubtedly a welcome sign—being decisive, and going deeper by targeting rural demand is now the need of the hour.
The writer is Former Union secretary (Views are personal)