As the Budget session approaches, it is expected that prompt measures will be taken to mitigate various challenges faced by the economy that have strangulated its growth in recent times.
However, laying out a clear and singular path to recovery is quite a challenge as it comes at a time when the economy is beset with a myriad of problems demanding fiscal stimuli. The fiscal constraints faced by the government add to the existing woes.
What signals a worrying state of affairs is the slump observed in two primary drivers of growth -- consumption and investments.
Private consumption expenditure, which is reflective of the economy's demand, has seen a consistent fall in growth since Q2 of 2018–19. The drop in rural consumption has been alarming, recording a slower growth than the urban counterpart.
Major FMCG (fast moving consumer goods) companies reported dampening of demand from rural households. This is validated by the quarterly (July–September) report released by Neilson which stated that rural consumption grew at 5 per cent as opposed to 20 per cent in the previous quarter. The distress in the rural segment is evident in the numbers observed for the agriculture, forestry and fishing segment in the September quarter of GDP (gross domestic product), which grew at 2.1 per cent slower than 4.9 per cent reported a year ago.
Historically, India’s GDP growth has been consistent with the growth in the rural sector. The growth years have coincided with flagship schemes such as the Pradhan Mantri Sadak Yojana and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), establishing the importance of boosting the rural sector for national development. These projects helped in creation of more liquidity on the rural front in the form of employment generation, which led to more rural consumption and improved market conditions for competitors.
There has been a disturbing trend of fall in investments and business confidence. The Gross Fixed Capital Formation, a metric to gauge investment in the economy, recorded 1 per cent growth in Q2 of this financial year. Taking cognisance of this, the government announced measures such as corporate tax cut to boost investment. Although well-intentioned, there was little or no incentive for corporates to expand their productive capacity in the midst of falling demand. The RBI (Reserve Bank of India) report of 2019 indicated that the private corporate sector’s saving-investment gap has almost closed and investments are financed through their own savings, signalling a reduced appetite for fresh investments.
Investments are paramount to address an ailing economy. But for investments to be forthcoming, the current state of affairs undisputedly calls for an immediate consumption push.
Intriguingly, the government has to take a very cautious approach to stimulate growth. There is a mounting pressure on the government to miss the fiscal deficit target. While the government has set the target at 3.3 per cent, concerns on fiscal transparency have surfaced pertaining to its off-budget expenditure, as released by the Press Information Bureau.
The recalculated version of deficit presented by the Comptroller and Auditor General pointed out that the actual deficit, when accounted for off-budget borrowings, stands at 5.85 per cent. This is to say that the government does not have much fiscal space. The move on relaxing fiscal deficit should come with a realistic justification on matching that deficit in this financial year.
With this limited capacity and a daunting goal to boost consumption, the government should direct its attention to rural India where the intervention will be most effective. It should begin by rationalising expenditure by prioritising key areas of intervention and ensuring last-mile deliveries in a time-bound manner. The clamour for tax cuts or incentives to be provided to the salaried population is ill-conceived when the salaried population of India stands at a mere 4 per cent figure.
At a time when tax revenues are falling, additional tax cuts will further limit government’s ability to allocate resources for important sectors.
As an immediate course of action to arrest the slowdown, an increased allocation directed towards measures such as boosting rural credit flow and promoting agricultural exports is necessary. An emphasis on core schemes such as the PM-Kisan and the MGNREGA will revive the distressed rural economy within a quick turnaround time. However, this depends on the government’s ability to create employment and raising the income level of the rural segment. The need for strengthening institutional capacities in the last mile is a major challenge that cannot be addressed in a Budget speech.
In parallel, efforts towards structural reforms have to be undertaken through sound policy measures.
India should leverage its large unskilled labour force in its development strategies. Real estate is one sector that absorbs high labour due to its strong backward and forward linkages with other domestic industries. Unfortunately, the sector is in a dismal state partly because of unfavourable policies that deter both demand and supply forces. Therefore, easing the land acquisition process, liberalising land laws and simplifying the procedures governing the sector will send positive signals.
While India needs a long-term structural reform on many fronts, a speedy course correction on these lines will help put the economy on the road to recovery.Nissy Solomon is Senior Research Associate with CPPR-Centre for Comparative Studies, Kochi. Views are personal.