Budget 2020: What the govt can do to boost income of the poor, revive demand
Prasanna Mohanty January 16, 2020
That India's primary response to the economic downturn is to boost private investment - cut in corporate tax, bank mergers, recapitalisation of banks, cut in GST rates and benchmark repo rate, higher depreciation on vehicles etc. - is not working is evident.
Growth in bank credit flow down
The RBI has cut the benchmark repo rate by 135 basis points between February-October 2019 but that has had little impact on the credit outflow. Its latest data shows that growth in gross bank credit (outstanding) in November 2019 had fallen to 1% - from March 2019.
A year-on-year comparison shows growth in gross credit slowing down from 13.6% in November 2018 to nearly half - 7.3% in November 2019.
Growth in bank credit to industry also fell from 4% in November 2018 to 2.4% in November 2019, though during the March-November 2019 period it showed an uptick.
The reason for this low growth in demand for credit is evident in industrial production. Capacity utilisation (CU) has fallen to 68.9% in Q2 of FY20 - the lowest since 2008.
Industrial production is shrinking with the growth in the index of industrial production (IIP) falling into negative zone in the months of August, September and October 2019 - as shown in the graph below. The fall is more pronounced in the eight core industries - constituting 40% of the IIP.
The RBI's bi-monthly monetary policy statement, released on December 5, 2019, says, "According to the early results of the Reserve Bank's industrial outlook survey, overall sentiment in the manufacturing sector remained in pessimism in Q3:2019-20 due to continuing downbeat sentiments on production, domestic and external demand, and the employment scenario."
So, India needs to change its strategy of relying on private investment to revive the economy.
What India could do in Budget 2020-21?
First, some key statistics presented in the box and graphic below.
More shocking news came from the government's chief think tank, the Niti Aayog, on December 27, 2019.
In its report 'SDG India: Index & Dashboard 2019-20', the Niti Aayog said poverty, hunger and income inequality went up across 22 to 25 of the 28 States/UTs it mapped.
The Niti Aayog had set a baseline in 2018 and then mapped the progress in 2019.
Five probable measures to raise aggregate demand
What the Niti Aayog report shows is that there is an urgent need to provide support to people at the lower end of the economic ladder. This would ensure a dignified life for them and generate demand in the economy.
Some of the solutions are actually simple and present themselves.
(a) More government expenditure: On infrastructure, especially in rural areas
Economist Prof C Rangarajan lays greater emphasis on increasing government investment in capital expenditure to (a) generate demand in the economy and (b) create a base for future growth. He is not exactly averse to the government exceeding the mandated level of the fiscal deficit but says all such investment must be in the capital account. This would be tough, given the tight fiscal situation and weaker revenue growth, he admits but says higher capital expenditure would also crowd in private investment.
Economist Prof Arun Kumar also emphasises that more investment should be made in rural infrastructure, including roads, housing, health and education, for both short-term gains and long-term growth. It is the rural economy that has been hit the hardest in recent years due to various economic shocks and slowdown.
(b) Higher minimum wages
The last time the central government raised the national minimum wage was in 2019. The hike was by a mere Rs 2 - from Rs 176 to Rs 178 - while an expert committee set up by it to fix a national floor rate proposed Rs 375 per day (Rs 9,750 per month) as the statutory minimum, irrespective of sectors, skills, occupations and rural-urban locations, for a family of 3.6 consumption units, and an additional house rent allowance of up to Rs 55 per day for urban workers.
The negligible raise in national minimum wage was particularly disappointing because the last Economic Survey had talked about the "lighthouse effect" of a universal minimum wage - minimum wage acting as a benchmark to pull up wages in low-paid and informal sector by enhancing the bargaining power of vulnerable workers.
The reluctance to raise wages is not limited to the national floor rate.
The following table would show how the wages for the rural job guarantee scheme - MGNREGS - have also not been raised by the central government for the past three years.
A higher wage rate means higher income and consequently higher consumption expenditure.
(c) Expanding MGNREGS
Prof Kumar says in addition to raising minimum wages, the allocation for the MGNREGS should also be increased to provide 100 days of work - raising it from the current average of about 45 days. He also advocates a similar employment guarantee scheme for the urban poor.
Economist Pronab Sen supports a higher allocation for the MGNREGS for another reason too. He says the Budget 2020-21 should prioritise fund allocation on the basis of how fast funds can be spent. Since the MGNREGS is a well-established programme, the central government would do well to focus on this.
(d) Expanding PM-KISAN scheme to landless agriculture labour
The PM-KISAN scheme was launched in the 2019-20 budget (in February 2019) for the small and marginal farmers, with retrospective effect, just ahead of the general elections and was later expanded to cover big farmers too. It envisages an annual income transfer of Rs 6,000 in three installments.
Most glaringly, it leaves out the officially classified "poorest of the poor" - landless, agriculture labour who constitute 55% of the total agriculture workforce. The poorest of the poor can now be easily drafted in using the highly successful JAM (Jan Dhan-Aadhaar-Mobile) initiative.
This scheme has been tardy in implementation though. It is supposed to benefit 14.5 crore farmers at a cost of Rs 87,000 crore annually. But as a reply to the Rajya Sabha shows only half of the farmers (7.6 crore farmers) had received the benefits and less than half the amount (Rs 36,000 crore) could be disbursed by November 30, 2019.
(e) A Universal Basic Income (UBI) scheme
The concept of a universal basic income (UBI) was first mooted by the former chief economic adviser Arvind Subramanian in his Economic Survey of 2016-17. The basic premise was: "A just society needs to guarantee to each individual a minimum income which they can count on, and which provides the necessary material foundation for a life with access to basic goods and a life of dignity".
It proposed an income transfer of Rs 7,620 per annum to 75% of the population and said this would cost 4.9% of the GDP, which could be funded from 5.2% of the GDP allocated for 950 central sector and centrally sponsored sub-schemes in 2016-17.
Economists have differing views on this, even though more than 100 countries, including Canada, Finland, the Netherlands, Italy, the UK and the US have already run or are running pilot projects.
Nevertheless, given the fact that India is witnessing a dramatic rise in poverty, hunger and income inequality - a complete reversal of a situation when it lifted 271 million people out of multidimensional poverty (MPI) in a period of 10 years between 2005-06 and 2015-16 - this could be the time to revisit it.
While the Niti Aayog's SDG report cries out for urgent efforts to stop the spread of poverty, hunger and income inequality, there is another good reason for taking measures to raise the income level of the poor or the bottom pile in the income level. Here it is.
Rise in income of poor drives higher GDP growth
The IMF which is the proponent of neo-liberal economic policy, made an interesting discovery some years ago.
In a study covering more than 150 countries, which was published in 2015, the IMF found that a rise in income of the rich actually led to a decline in GDP growth but that of the poor did the reverse - propelled a higher GDP growth.
It said: "...if the income share of the top 20 per cent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 per cent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels".