A revival plan
Source: By Bibek Debroy: Mint
In addition to what’s been announced earlier, the economic package had five tranches on five successive days. The first focused on small and medium enterprises, non-bank financial institutions, real estate and liquidity. The second focused on migrants, affordable housing, street vendors, and micro credit. The third focused on agriculture, animal husbandry and fisheries. The fourth on private-sector entry, the opening up of India’s coal sector, and the privatization of power distribution, airports and Union public sector enterprises (PSEs), as well as on raising foreign direct investment (FDI) limits. The fifth focused on the rural employment guarantee, postponement of insolvency and other compliances, and incentivizing reforms in states by making their enhanced borrowings contingent on these.
There were others too, but the above were the major ones. Once you unwrap the package, several strands should be construed as “reforms", with little to cavil about. Shouldn’t the Essential Commodities Act (ECA) and Agricultural Produce Marketing Committee (APMC) Acts be redone and agricultural marketing and distribution opened up? The agricultural and rural sectors have hardly been touched by post-1991 reforms, and if they were left to states alone, not much would have moved.
Shouldn’t there be privatization (of PSEs) and greater private sector participation in the economy? Shouldn’t FDI caps be hiked? Shouldn’t there be portability of identity through a unified ration card? Think about the Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act of 1979, and about what state labour ministers highlighted back in 1976. Has it been enforced? Has there been registration of principal employers or contractors? These questions are rhetorical.
Mostly everyone views government action through an individual lens and personal expectations. The commentary offered is usually by a thin slice of the population that can be called “D" as in direct taxpayers—personal and corporate. Formalization doesn’t occur overnight, but more than four decades is long enough. Had the 1979 legislation been actually enforced, wage and non-wage costs of migrant labour would have increased, which may not a desirable outcome from a D perspective. Anything that liberalizes the rural sector could be unpalatable to this group. For instance, if agricultural trade is freed, domestic food prices are likely to generally increase, which could then be used as an argument to restrict farm exports. You won’t hear such a price-rise argument articulated in favour of clamping down on garment exports.
Fragmentary data for the first two weeks of May reveals an intriguing phenomenon. Domestic remittances have reversed direction and turned rural to urban. That’s a metaphor for many arguments advanced against the package. That it is rural emphasis doesn’t resonate with people. Beyond that, critics have argued that it is too supply-side heavy that it focuses on structural reforms, not demand. Before India imported the virus and there was a growth slowdown that saw a somewhat dysfunctional debate between demand declines versus structural constraints, many of those critics argued that the government wasn’t paying sufficient attention to structural reforms. Today, there is near unanimity that real and nominal growth in 2020-21 will be negative. A growth revival in 2021-22 would depend on factor-market reforms and productivity increases. So, subjective biases apart, there should not be any criticism of the government on grounds of commission.
There has also been criticism on grounds of omission. For instance, a poll suggested that chief executive officers are disappointed because there haven’t been sector-specific tax sops for troubled sectors like hospitality, travel, tourism, telecom and aviation. Individuals are also disappointed on the same count. But ponder the following. First, sector-specific sops distort resource allocation and make the task of tax simplification difficult.
Second, in any event, the multiplier effects of tax sops are doubtful and inferior to those of government expenditure. Nor is there convincing evidence on tax cuts being passed on to consumers. Third, there is a clear correlation between a continued lockdown and urban production shortfalls (CHK), suggesting inelastic supply curves in urban India now. What utility will an expansionary fiscal policy (interpreted as increased public expenditure) have there? Instead, fiscal expenditure should focus on rural India, as it has.
Fourth, there is also a credit-rating issue, interpreted not as actions by external rating agencies, but an internal assessment of the credits (revenue) and debits (expenditure) of government accounts. By around October or November, there will be pressure on Union and state government revenues. There will be enhanced expenditure because of emergency health-related measures, health infrastructure and demand-driven (MGNREGA, housing) expenses. What we have in the package is something like a covid budget, and what’s been suggested is akin to a budget estimate (BE). In the revised estimate (RE) that follows, receipts are typically lower and expenditures higher.
Fifth, if nominal gross domestic product (GDP) growth in 2021-22 is also low and the government rates of borrowing are what they are today, there will be a serious debt management issue. Hence, it is prudent to leverage budget expenditure, instead of opening the tap wide. Thus, that figure of 1% stimulus as a proportion to GDP can mislead.
Projections depend on assumptions. But for this year, perhaps a Central fiscal deficit-to-GDP ratio of 6.5%, with 4.5% for states, is fair. With some inevitable slips on both revenue and expenditure, without considering off-budget liabilities, a combined deficit of 12% can be assumed. There is not much point making comparisons with other countries that have different fiscal situations. At best, India’s stimulus could have been expanded by another percentage point of GDP. But this would have its costs too. Also, this is a BE, not an RE. Given the contagion, lockdown and uncertain revival, there’s no harm being conservative, at least for now.
To conclude, consider the imagery of the high-five. Conventionally, it refers to a palm held up and slapped against another’s. After coronavirus, hand-shakes and high-fives have yielded to “namaste". In anticipating the package, some people expected a take five and are disappointed with the namaste. But a gesture has been made, and for the moment, it looks to rural India as a growth driver.
