Way To $5 Tn Economy

By By Nilanjan Banik and Buddhadeb Ghosh :

Finance Minister has to decide as to which sectors to intervene, and how to intervene. In the recent past, the Government machinery performed well when it came to some specific intervention in the social sector.

THE Budget is all about allocation of resources towards social sectors such as education, health, infrastructure and agriculture. Ideally, the Government should spend/allocate funds toward any sector, in a fashion, which requires the most. Take for example the agriculture sector. There are around 500 million farmers with more than 50 per cent of the Indian labour force depending on agriculture and allied activities. As there is an indication that there is a fall in consumption expenditure (first time in four decades), the question is how do the public policymakers give money in the hand of the rural folks? Take for example the interventions in the agricultural sector.

Do the policymakers go for subsidy schemes such as farm loan waiver, or do they build more cold storages? Or do they build more food processing units? Each one of these interventions comes with a cost and therefore the Government should intervene in a fashion so that it gives maximum benefit for the economy. Unfortunately, consumption expenditure is not growing because of a lack of jobs and a general slowdown in the economy. Consumption expenditure accounts for 60 per cent of national income. New jobs are hard to come by. Presently, there are 25 million people without jobs. There is excess capacity in the manufacturing sector.

Agriculture and construction are not performing either. During 2019, investment as a proportion to GDP stood at 29 per cent much lower than the 15 years average of 34.8 per cent. India’s trade balance recorded a deficit. The trade balance is likely to worsen further with the brewing of US-Iran tension. Because of the erratic climate, water shortage, and a fall in agricultural productivity, rural consumption is down. Starting in 2013, the real-estate sector, that used to be the mainstay for absorbing agricultural labourers as construction workers, has not performed. Even intervention such as PM Kisan is not becoming effective. There are around 500 million farmers. Most of them don’t have Aadhaar linked with their bank account.

This means that although the Government has allocated INR 75000 crore for this project a bulk of this money has not benefited the small and marginal farmers. Questions are also raised about the implementation of schemes such as MGNREGA, marked with corruption and nepotism. The root cause of the problem is the lack of financial inclusion and literacy rates among the farmers.

Another reason for consumption expenditure slowdown has to do with a poor performing Small and Medium Enterprises, which employ a bulk of our non-agricultural population. India has 560 million young people under the age of 25, and without adequate manufacturing capability and inability to participate in the global production network India’s demographic dividend may turn out to be a bane. For instance, most of the firms in the textile and apparel industry which employ around 45 million people are of SME types. The economic downturn is hitting this sector most, with many apparel firms retrenching workers. In contrast, big industries, such as Reliance with a similar market size employ only 0.2 million people.

This has contributed to income inequality when we look at the organised vis-à-vis the unorganised sector. The SME sector is dying because the Government is not giving back the input credit on account GST paid earlier. Apparel produce can gain 3 per cent of the price competitiveness if they get back the input tax credit back on time. Unlike in China, wherein a major portion of the growth is driven by foreign direct investment (FDI), for India, it is domestic consumption. Over the last 20 years, China was able to create some 225 million manufacturing jobs, mostly through FDI inflow, making China, Factory of the World. FDI in manufacturing is a distant reality for India given the problem with land acquisition and labour laws. Finance Minister has to decide as to which sectors to intervene, and how to intervene. In the recent past, the Government machinery performed well when it came to some specific intervention in the social sector.

Apart from Swachh Bharat, schemes such as complete electrification of 6 lakh rural villages and PM Awas Yojana (housing for all) were able to generate, employment, income and better health for the masses. Reform measures such as the introduction of the Goods and Services Tax, and Insolvency and Bankruptcy Code (IBC, 2016) have, to a certain extent, reduced the cost of doing business. For instance, IBC, 2016 by consolidating all insolvency-related laws applicable for individual, partnership firms, limited liability firms, and company, under one umbrella, has made it easier for banks to recoup bad loans and reduce non-performing assets. However, the Government needs to simplify the process of filing GST, and also ensure speedy settlement of court cases.

These structural hurdles can be reduced by bringing in reforms in labour laws and making land acquisition easier. For instance, various elements related to labour laws such as contract labour, child labour, maternity leave, provident fund, etc., can be simplified by bringing them under one umbrella. Likewise, to prevent agitation and to procure agricultural land for non-agricultural purposes, farmers have to be made stakeholders. Farmers can be given part of the land in a developed form. Alternatively, proceeds from the sale of land can be put in interest-bearing bonds, so that the farmers need not protest against high land prices during subsequent years.