INDIA ECONOMIC FORUM & LITFest

The Union Budget has arrived at a crucial moment in India’s journey to regain economic growth. The Indian Economy took a sizable hit from the pandemic and 3 COVID waves later, the opportunity is ripe for India to chart its course on the path of recovery and growth. However, the job is easier said than done. The economy faces serious challenges that are laced with complexities and no simplistic approach can solve our economic woes. The inaugural session of the India Economic Forum held on 4 February 2022 discussed the  Union Budget and its implications on several crucial issues such as the Economic growth, Jobs, Rural Distress, Public Services Delivery and others. The discussion raised several important questions on where India, as an economy, is headed and what should be done to create inclusive and job generative growth that benefits the societal sections that have been hit the hardest financially from the pandemic.

CHALLENGES

Several issues plague the Indian economy as of now. The discussion highlighted that while the economy has been recovering from the pandemic-induced slowdown, the recovery has been unequal for the formal and informal sectors of the economy. The informal sector was impacted severely by the lockdowns and consequential economic stagnation. While the recovery in the formal sector has been promising, this is not the case for the informal sector. The upheaval in the informal sector has also exacerbated the issues of unemployment at all levels of the economy. The move of the labour force from urban to rural areas has led to a large part of the rural economy functioning only on a subsistence basis. This has created issues for consumption demand in the economy and this can only be solved through job generative growth. If a large part of the population is working for subsistence, it is difficult to have high consumption in the economy. This can be seen clearly in the case of agricultural growth recovery. In absolute terms, there has been growth in the agriculture sector, but at the same time wages in agriculture have gone down creating a demand crunch and financial distress The pandemic has also disturbed the delivery of public services such as education, nonCovid healthcare and nutrition massively and these need dedicated policy interventions to restore order. India needs investments in public goods and human capital formation to ensure that the growth engines for a sustained recovery can be restarted. Without investments in critical infrastructure in health, education and nutrition it is difficult to achieve high levels of growth. To summarise Job generation and Investment in public services is the way forward to ensure a holistic economic recovery.

KEY ISSUES

The Union Budget this year had to navigate the tough waters of prudent fiscal policymaking and stimulating economic recovery. The budget has not provisioned any significant tax cuts to maintain cash flows for the government. The stance of the government is clear, it is prioritising capital expenditure to boost the economy and generate job growth. By increasing public expenditure, the government is hoping to create assets that will attract private investment and spur growth. There has been a reduction in monetary outlay for Social Welfare primarily through reducing budgets for schemes like MGNREGA and areas such as Health (non-Covid). The questions that arise are if there was sufficient fiscal space for the government to continue relief measures? And will expansion in capital expenditure directly lead to an increase in jobs and growth in the short term?  In a curious U-turn to what the Economic survey had prescribed, the budget surprisingly opted for a higher deficit. It has increased the fiscal deficit to 6.9% of the GDP and even next year pegs it at a dangerous 6.4% of the GDP. Such high levels of fiscal deficits impact the economy in several ways and adversely so. A high fiscal deficit often results in a price rise. It also tends to drive away foreign investment, especially if the deficit is covered by the government printing more money. A high fiscal deficit also results in high interest rates, making the cost of capital go up and thus reduce consumption.

RECOMMENDATIONS

What needs to be the direction that the Indian economy needs to take, the answer is clear – job generative inclusive growth is the way forward. There are several questions on how this growth can be achieved and there is no single answer. The panel made the following recommendations:

• Increased Capital Expenditure on its own will not fix our economic issues, the Indian economy is faced with major challenges of unemployment, rural financial distress and inadequate human capital formation.
• Capital Expenditure in areas such as infrastructure provides delayed returns because of long gestation periods.
• Although there has been a rise in agricultural output, but the income of farmers has fallen. There is a need for increased institutional support for income supplementation and reducing dependence on monoculture practices.
• There has to be increased monetary allocation to the social sector to generate inclusive growth.
• There has to be revenue expenditure, specifically in schemes such as MGNREGA so that wages are paid on time to workers and the issue of rural financial distress can be solved.
• There has to be focus on ensuring uninterrupted delivery of key public services such as education and health. There has to be sufficient monetary allocation to support this.
• As the finances of the State Governments are getting squeezed, it has to be ensured that States get their due of taxes as per the recommendations of the 15th Finance Commission.
• The State Governments should have more autonomy in making laws about their socioeconomic matters.
• The MSME sector does not have enough access to institutional credit, there have to be dedicated interventions to make credit accessible to them to create jobs.
• The MSMEs that have received financial support under the Emergency Credit Line Guarantee Scheme (ECLGS) are mainly large units, smaller units have not been able to benefit much from the scheme, there is a need for course correction here.
• There has to be a linkage of the PLI scheme to job induced growth, as of now most of the sectors getting subsidies under the PLI scheme are very capital intensive.
• There has to be increased expenditure on flagship schemes that deliver important public services such as education, nutrition, health (non-COVID) and water supply.
• There has to be a wellrounded manner in which government expenditure is structured so that economic recovery does not remain restricted only to the formal sector.