BackThe budget’s stimulus measures must be aimed well for a revival
The budget should be as much about measures to ease supply-side obstacles to growth as about a Keynesian stimulus per se
PremiumThe general consensus in all the pre-budget advice to the finance minister is that the fiscal caution of 2020 must yield to a flamboyant opening of the fiscal gates. We are closing the current fiscal year with a 7.7 % real drop in gross domestic product (GDP), by the official advance estimate for 2020-21. Recall the eight successive quarters of declining GDP growth before covid, so this has to be as much about using fiscal and non-fiscal measures to release supply-side obstacles to growth as about a Keynesian stimulus per se.
The key issue is where the fiscal stimulus should flow in order to repair supply chains, which from the evidence of retail inflation are already unable to keep up with such restoration of aggregate demand as has already happened. This calls for a focus on lagging sectors in the GDP estimates.
The steepest decline is in (internal) trade and transportation, at -21.4%. This sector also includes hospitality and tourism, which took a direct hit. The immediate imperative is to release people from the fear of mobility. Free vaccination has to go beyond front line health workers and police, to operators of road and rail transport vehicles as a mobility facilitator. These revenue-account expenditures will have an immediate supply-side impact. The intent should be to give people the confidence to be mobile again. Restricting free vaccination for fiscal savings will be penny wise, pound foolish.
The need for infrastructure expenditure is widely accepted and already shows in the sharp recovery in construction projected for the second half of the current year. The emphasis should shift from grand new projects that will deliver several years into the future to the completion of unfinished projects. The last monthly listing of large central projects issued in October showed that 70% of those with known completion dates lay incomplete, with an average delay of 3.5 years. Incomplete projects are a deadweight loss. Among the constraints to completion in the past were non-payment of dues to contractors. The current fiscal loosening offers a golden opportunity to pay-off past dues, and hasten the completion of projects held up for that reason. Thereby lies an immediate supply-side dividend with which to pay-off the enhanced borrowing.
Health infrastructure is an imperative, but the funding has to go to states, under whose Constitutional jurisdiction health falls. The 12 October Atmanirbhar package provided ₹12,000 crore in interest-free loans to states for infrastructure expenditure, with bullet payment after 50 years. More funding along this avenue, without sectoral strictures, will make for spatial spread in recovery.
The Mahatma Gandhi National Rural Employment Guarantee (MGNREG) has to continue unabated, and if allied to construction of warehousing and cold chains for perishable farm produce, so much the better.
The desperate nutritional status of children in poor families is revealed in round 5 of the National Family Health Survey (NFHS) based on survey data for 2019-20, well before covid. The Integrated Child Development Scheme (ICDS) suffered a body blow during 2020-21. Anganwadis were closed. These have been re-activated only in a few states. The 2020 Pratham report is upbeat about how teachers and parents kept the education process going, but the mid-day meal stood suspended. Going forward, the nutritional intake of pre-school and school children needs to be restored. Locally-sourced foods can dovetail into the bid to raise farmer incomes.
The additional free foodgrain entitlement to poor households under the Garib Kalyan Yojana from March to November 2020 was a within-household replacement for those external nutrition schemes, but a partial one at best. And poor households not covered under the ration card scheme did not even get that.
Covid 2020 was very different from textbook recessions, where tax revenue declines but expenditure can be held steady to provide an automatic stabilizer. Covid closures meant declines in routine departmental expenditures included in the budget estimates (BE) for the current year—on transportation, travel, office canteens, stationery, and many such. These are among the reasons why the net increase in fiscal expenditure does not reflect the additional stimulus expenditures announced.
There are many non-fiscal measures needed. The decline in the mining sector in the second half of the year is projected at -8.6%, second only to trade and transportation, while there is a corresponding rise in the price of iron ore going into steel rods, threatening the recovery in construction. Re-assembly of the mining labour force needs to be urgently attended to by labour departments at both the Centre and states. The multiple measures introduced by the Reserve Bank of India for micro, small and medium enterprises (MSMEs) were timely and excellently structured, but they cover only MSMEs with access to banks. We need a credit initiative of the group lending variety to encourage new enterprises started by entrants into the labour force. This by itself will not suffice. The reverse-charge mechanism needs to be restored in full for the goods and services tax to not be hostile towards small enterprises. And we need a bad bank that can offer a more universal arm’s- length asset pricing option than asset reconstruction companies.
Indira Rajaraman is an economist
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