Bengaluru, Karnataka, India
Jan 29, 2018, 05.18 AM
The upcoming Union Budget is the last full budget of the present government before the 2019 general election. As expected the question doing rounds is, will the finance minister present a “populist” budget with a view to the elections or “stay the course” of fiscal consolidation and related reforms.
The question is made sharper by the likelihood of the central government exceeding its expenditure target for 2017-2018. The prime minister’s recent comments that he does not believe the “common man” wants “freebies and sops” have been interpreted as indicating a non-populist budget.
It is very unfortunate that the “populist” versus “reform” frame continues to dominate discussions on the budget. Such a framing is useless for any real analysis because both the magnitude and the direction of government spending are equally crucial as are the magnitude and sources of government revenue. There may be good and bad reasons for exceeding the expenditure targets for the year, as well as good and bad reasons for falling short of revenue targets. Hence, creating more fiscal room in the budget by revising the deficit target upwards is not in and of itself either good or bad. If it is done with a clear path to raising future incomes for the vast majority, it is very welcome and will pay for itself in the future.
Let me illustrate by taking the three main issues that are of widespread concern leading into the budget: rural distress, lack of jobs, and weak private investment.
First, consider rural distress, an issue that is, sadly, on the agenda nearly every year. The recent Gujarat elections have given a much needed political boost to the issue since it is cited as one of the reasons behind the BJP’s reduced majority. The rural sector “wish-list”, at a minimum would include,
* Implementation of the Swaminathan Commission recommendation of minimum support prices equal to 50% in excess of the costs of cultivation.
* Complete rural electrification in substantive terms. That is, not the token delivery of power, but adequate and timely power supply on par with that available in urban areas.
* Increased overall public investment in agriculture, particularly in irrigation, sustainable practices, and so on. It is noteworthy that investment in agriculture which was around 3.8 percent of GDP in the early 1990s has steadily fallen since then.
* Strong push for the non-farm sector, which is obviously the future of sustainable employment in the rural economy. This is also where the rural distress issue meets the jobs crisis squarely.
Second, take the jobs crisis. In his recent interview, the prime minister has, unfortunately, chosen to trivialise the issue by equating low-paying informal livelihoods, such as selling tea and pakoras with secure, well-paying employment. The demand is for the latter, the former already exist in great numbers. He has rightly been criticised for this.
The prime minister also claimed a large increase in formal employment based on a recent study of data from the Employee Provident Fund Organisation and other similar institutions (such as ESIC and NPF). The study is a novel attempt to use administrative payroll data from such agencies to estimate employment. Its main conclusion is that an estimated 7 million new accounts were added into the system in FY 2017-2018. This is welcome news.
But it cannot be used straightforwardly to draw conclusions about job creation for two reasons. First, the approach measures new PF, insurance, and pension accounts. Not new jobs. As Jairam Ramesh has pointed out, some of the new accounts may be existing jobs without benefits being converted into jobs with benefits. A welcome development, but not to be confused with an increase in employment. The authors partly correct this problem by excluding those accounts that were created during the PF amnesty period. But this does not address all the problems arising out of demonetisation and GST implementation raised by Ramesh.
Second, even assuming that new accounts mean new jobs, to say something about the employment situation we need to know how many jobs were lost during the same period. The study does not address this. If recent work based on Labour Bureau annual household surveys is to be believed, the Indian economy has been losing jobs on a net basis. Even if payroll data adds another dimension to our knowledge on employment, taking both this factors into account, the net new jobs created may be far less than 7 million. Using this data uncritically to support job creation claims is jumping the gun.
On a more optimistic note, a National Employment Policy has been widely reported to be on the cards for this year’s budget. But there are no details on what such a policy would entail. One hopes to see more direct job creation say via public investment in services. There is likely to be some focus on public investments in infrastructure for job creation. But a broader approach to public job creation would be welcome in the policy. Particularly creating jobs to improve the quality and delivery of services the government is already committed to providing, such as health, education, housing, and transport.
I have also chosen these as examples deliberately because data show that these are the largest part of the household budget (except food). Indeed, there is evidence that poor households are cutting back on food consumption to pay for health, education, housing, and commuting expenses. Recently, NITI Aayog VC Rajiv Kumar has also observed that low-cost or free provisioning of such services would go a long way in raising real incomes.
There are legitimate concerns here, of course, to do with the quality of public service provisioning. Do we really want the government spending more money on schools and hospitals when the quality is so bad that anyone with sufficient resources chooses to exit the system? In fact, as I mention above, exiting the public system and “going private” has its costs. The obvious solution is to repair the system, not abandon it.
Third, take the weak private investment climate. This is not a long-run structural issue like rural distress or the jobs crisis. But nevertheless, it is important in the short-run. Here too the fiscal implications are straightforward. An increase in public investment will most likely “crowd-in” private investment. That is, when the government spends in such a way that incomes rise, this creates demand that will bring forth private investment. In the face of lack of demand, as is the case right now, no amount of tax or other incentives really work to stimulate investment.
Obviously making a serious dent in any of these problems requires fiscal resources, both in the sense of increased spending and possibly foregone tax revenue. But if all the above make additional demands on the fiscal, all also have the potential to pay back many times over with increased incomes and increased demand. This brings me to my original point about the nature of government spending and revenue generation.
Failing to meet the fiscal deficit target due to increased public investment in agriculture or healthcare is not the same as failing to meet it due to foregone tax revenues on highly profitable large corporations or high net-worth individuals, both of which are increasing rapidly in India. Conversely, insisting on meeting the target at the cost of raising incomes and demand is not sound economic policy.
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)