Revive consumption by creating more jobs
By Dipti Deshpande
Each annual EU budget is a creature of its context that highlights certain priorities.
The new year has brought with it a new set of challenges for India. Just as the economy was recovering from the second wave, came omicron and uncertainty in its wake. Meanwhile, monetary policy, which has done most of the work for the past two years, has begun to move, albeit cautiously, towards “normalization”.
It is not so simple, however, for fiscal policy.
With most of the initial pandemic-related disruptions behind us, this year’s budget could follow a path of fiscal deficit correction, but not aggressively, given that the economy is not fully back on its feet. In other words, the fiscal responsibility and fiscal management goal of a 3% gross domestic product (GDP) deficit pales in the face of the urgency to revive growth.
Moreover, with the emergence of greater urgency to normalize monetary policy—domestic inflation risk and US Federal Reserve action being hot topics—fiscal policy may need to take the slow path toward recovery. budgetary discipline.
That being established, the key question that remains before this budget is: should the government continue to focus solely on the path of economic growth led by capital expenditure (capex), or could it also adopt measures to support consumption in the short term?
Recent budgets have clearly signaled the government’s intention to boost growth through a combination of investment spending and reforms, which should alter the medium to long-term growth trajectory. But with the pandemic putting millions of people out of work and their ability to spend dramatically weakening, immediate measures to support incomes and private consumption are crucial and can provide a much-needed bridge to the medium-term trajectory.
Of course, the EU budget should not be the only opportunity to do so. But it continues to hold significance as an event signaling where the government’s spending focus might be during the year.
Basically, there are two areas where the government could make a difference.
Income growth through increased allocations for employment programs
The revenue slowdown, which began in fiscal 2018, worsened with the pandemic. Data from the Office for National Statistics shows GDP per capita grew by 6.9% in FY2017, then slowed steadily to 3% in FY2020. contracted sharply by 8.2% during the 2021 financial year. Beyond that, the catch-up was slowed down. At the end of this fiscal year, it would not even have caught up to fiscal 2020 levels.
The onset of the pandemic and the resulting national lockdown resulted in a reverse flow of migration from urban to rural areas. For fiscal year 2021, the government has announced a higher allocation under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and rural construction works, providing assistance to workers in the hinterland .
But it was short-lived. In the 2021-22 Union Budget, these allocations were reduced as Covid cases were contained. However, the data suggests that in the absence of job opportunities in urban areas, the demand for rural jobs has remained high even in this fiscal year, much of which has gone unmet.
In fiscal year 2021, approximately 45% more person days were generated annually through the program. So far this fiscal year (April-December), person-days generated have fallen by around 6% compared to the prior year period, while employment demand has remained greater than the job provided.
MGNREGS remains the only lifeline for those at the bottom, who have borne the brunt of repeated pandemic waves, social distancing restrictions and norms, and lack of employment opportunities in the areas. urban.
The figures reflect how dependent rural people are on these programs and underscore the merit of increased spending under MGNREGS and other rural construction works programs such as Pradhan Mantri Awas Yojana and Pradhan Mantri Gram Sadak Yojana to support rural incomes and boost demand.
In this sense, it is also useful to introduce similar job creation programs in urban areas, as the downturn in activity continues to keep huge swaths of workers unemployed/underemployed, such as in urban construction, even if confinements have become less restrictive. The case for a national urban job guarantee program has been repeatedly made by experts as well as by the Parliamentary Standing Committee on Labor in its August 2021 report.
Similarly, the pandemic has led to a shift towards online shopping primarily in urban areas, which would have diverted demand (and therefore jobs/income) from the unorganized sector, given that e-commerce platforms are dominated by large organized actors.
Thus, income-oriented policy support should continue longer, until demand conditions show a sustained improvement.
Control inflation by reducing fuel taxes
The sharp rise in inflation in essential spending categories is digging a hole in the pockets of spenders. In general, rising inflation erodes purchasing power. But when inflation is high in items considered essential such as food, rent, clothing and health, where spending is rigid, it can discourage overall consumption, leaving very little to spend on discretionary items. .
In India, inflation in the essential goods category for the three years up to this fiscal year was, on average, 210 basis points higher than in the three years ending fiscal 2019. In contrast, inflation in the discretionary categories was only 50 basis points higher.
Fiscal policy can help control inflation by further reducing excise taxes on fuels. After a welcome reduction in petrol and diesel excise duty of Rs 5 and Rs 10 per liter respectively, in November 2021, further relief can now help the consumer.
The issue of fiscal space
Although nominal GDP growth is expected to decline from 17.6% in fiscal 2022 to around 12% in fiscal 2023, it remains strong. In addition, a widespread recovery and better compliance should benefit tax collection. From a budgetary point of view, there could therefore be room for maneuver to finance spending on job creation in rural and urban areas and to further reduce the consumer tax burden on fuels. The inflationary impact of spending could also be somewhat offset by lower fuel taxes.
This does not mean that a steroid facelift is recommended. Any support measures will have to be designed carefully after weighing their impact on consumer price inflation, which is already high and has remained so during the pandemic for a variety of reasons.
The government will have to maintain a delicate balance between low growth that requires political support and high inflation that discourages fiscal largesse. The difficult choice will be where to spend so that policy effectiveness is high and also generates short-term growth, without fueling inflation beyond what is tolerable.
Delaying a strong fiscal correction to make room for infrastructure spending and boost employment is probably the best bet at this stage.
Dipti Deshpande is Principal Economist at CRISIL Limited. Views are personal