Distributive policy

Fiscal policy must take center stage for a broad stimulus

The third wave of the pandemic may slowly recede, with covid infections declining, but the impact of the pandemic on the economy may last longer than expected. Much will depend on the government’s response to pandemic-induced disruptions. It is clear from a number of nationally representative surveys that the Indian economy is not only suffering from slowing growth, it has had widely varying effects on various sections of our population.

Recent results from the 2021 ICE360 survey, conducted by think tank People’s Research on India’s Consumer Economy, show a decline in the incomes of the poorest 20% of the population by 53% between 2015-16 and 2020-21, compared to a 39% increase for the richest 20%. These results are not surprising. In fact, they confirm similar data from several other surveys and nationally representative estimates of wages and employment made officially by government agencies. Given that our economy was already severely slowed before the pandemic hit, the urgency to revive it is not only an economic necessity, but also a social and political imperative.

The difference in fortunes of those at opposite ends of our wide range of income distribution is a matter of concern from the perspective of inequality in the country. But it is also at the heart of any attempt to revive the economy. The disruptions caused by government policies and the pandemic have only exacerbated an income crisis for a majority of our population. Real wages for casual workers, who make up nearly a third of all workers, have shown a decline over the past five years, claiming lower incomes for the bottom 40% of the population n t is no longer a mere statistical artefact, but a harsh reality. Indian farmers have also witnessed a decline in real income from growing crops, as reported in a recently released survey of growers by the National Statistics Office. The recently released preliminary national income estimates again confirm the seriousness of the economic situation, with private consumption in the country still lagging even from its 2018-19 level in real terms.

Despite the evidence, the policy response has been hesitant to use the fiscal route to revive economic growth, with monetary policy bearing most of the burden. Unfortunately, with rising global inflation and the resulting prospect of an upcoming tightening of easy money policies in the developed world, Indian monetary policy is unlikely to play the pandemic role assigned to it. . But there is also a second reason why fiscal policy must take center stage. Experience so far suggests that our current approach has had only limited success in reviving economic growth. The fact that private investment has not revived and that consumer demand also continues to show signs of weakness is not a coincidence, but the result of a misunderstanding of our economic reality.

The euphoria seen lately around an economic recovery based on encouraging tax collections is nothing but a reflection of inequality and consumption largely by the rich. Not only has this led to false readings of an economic recovery, but rising incomes of the wealthy have failed to rekindle the economy’s “animal spirit”, judging by trends in economic growth. private investment. Various tax breaks and exemptions, which have mainly benefited India’s wealthiest, have only widened the wealth and income gap, although they have had no positive impact on the real economy. .

The recent estimates are as much a revelation of our growing inequality and the differential burden of adjustment borne by different segments to a series of policy-induced and natural shocks to the economy, as they are a timely reminder to change the regime existing policy of the country. .

Our policymakers’ unshakable belief in investment-led growth financed by the savings of the wealthy in a constrained demand economy has not led to any substantial recovery. On the contrary, it has contributed to a squeeze on income for the majority. With capacity utilization just over 60%, a surge in investment is unlikely to help. Consumer demand is the real challenge.

While it is clear that the next budget and subsequent government policy measures should focus primarily on reviving consumer demand, such a policy is likely to succeed only if it is broad-based and leads to an increase in the disposable income of the lower half of India. With inflation likely to further erode their purchasing power, simply protecting real incomes is not enough. The budget must go further and ensure that real incomes increase.

Fortunately, the success of various government programs, such as the Rural Employment Guarantee Scheme, the provisions of the National Food Security Act and various income transfer initiatives, apart from pension schemes, have provided a mechanism leak-proof delivery mechanism that can be activated to ensure the delivery of benefits provided by public expenditures to the poor and vulnerable in the country. The Center is also likely to be in a privileged position in terms of revenue, with its fiscal health expected to improve thanks to higher nominal growth. Public expenditure must therefore be extended to general expenditure on social protection and basic infrastructure. This is not only a sure way to revive the economy, it is the only way to do so, regardless of the fiscal cost it would entail.

Himanshu is Associate Professor at Jawaharlal Nehru University and Visiting Scholar at Center for Human Sciences, New Delhi

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