Bengaluru: The Centre’s Rs 20 lakh crore ($266 billion) stimulus as a part of its Atmanirbhar Bharat Package to boost the economy “is unlikely to meet the requirements”, says Santosh Mehrotra, professor of economics and the chairperson of Jawaharlal Nehru University’s Centre for Informal Sector and Labour Studies. “A stimulus should be an attempt to bring the economy back to the preceding growth trajectory,” he says, adding that reforms in governance and administration are not the same as money in consumers’ hands, which is the need of the hour. Mehrotra was one of the authors of India’s 11th and 12th Five-Year Plans.
India has been under lockdown for more than 8 weeks to contain the spread of COVID-19. During this time, the country has become the 11th worst affected with 125,149 cases and 3,728 deaths, as per the Johns Hopkins tracker.
The pandemic and lockdown will slow down India’s economic growth, international agencies have noted. The International Monetary Fund has estimated a gross domestic product (GDP) growth of 1.9% for 2020 while the World Bank has forecast a growth of 1.5% to 2.8% for 2020-21, which is expected to increase to 4% to 5% the following fiscal.
As millions of migrant workers return home, “revival in rural demand requires that work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) increases, infrastructure projects are resumed so that construction jobs are created and a minimum income guarantee is put in place”, Mehrotra says. He believes India needs to create an architecture of cash transfer or minimum income guarantee of Rs 1,000 per household encompassing 60% of rural and 46% of urban households until the economy revives.
Mehrotra was director-general of the Institute of Applied Manpower Research (renamed as the National Institute of Labour Economics Research and Development), the first head of the Indian government’s Rural Development Division in 2006 and also headed the Development Policy Division of the Planning Commission from 2006 to 2009. He has authored and edited 12 books, including the recently published Reviving Jobs: An Agenda For Growth.
We talk to him about his suggestions to put more cash in people’s hands, reviving MGNREGA, creating a cash transfer architecture and the states’ approach to labour laws to tackle the impact of COVID-19 and the lockdown on the economy.
What is your assessment of the Rs 20-lakh-crore fiscal stimulus announced by the government, including measures for migrant workers?
It is unlikely to meet the requirements. A stimulus at the time of an economic crisis should be an attempt to bring the economy back to the preceding growth trajectory. The economy was already slowing before the pandemic. What matters now is money in people’s hands, which should be the aim of any fiscal stimulus.
More than 75% of the current stimulus is in the form of greater liquidity being provided by the Reserve Bank of India to scheduled commercial banks, and for enhancing loan windows (Rs 300,000 crore) to micro, small and medium enterprises (MSMEs). The latter is a monetary policy action. At a time when incomes are falling because unemployment has tripled in a matter of weeks, support for increasing consumer demand was needed. Reforms in governance and administration can be carried out at any time, they do not constitute money in the consumers’ hands. MSMEs will first need to borrow before they can revive their activities and new job creation by MSMEs will come only much later.
By contrast, a revival in rural demand requires that MGNREGA work increases, infrastructure projects are resumed so construction jobs are created and a minimum income guarantee is put in place so that significant cash transfers are made to poor households in rural and urban India.
This stimulus is only about 2% to 2.5% of the GDP. It is just half of what was declared in the aftermath of the 2008 economic crisis. Back then the government increased public spending and cut taxes, especially indirect taxes like excise. The result was a V-shaped recovery within two quarters. That is how the GDP growth rate averaged 8% per annum over 2003-04 to 2013-14. The current economic crisis is much worse. The GDP will probably contract in 2020-21.
More than 90% of India’s workforce is informal. Migrant workers form a significant portion of India’s workforce. How would you assess the impact of an extended lockdown on the economy and workers?
We need to understand the state of the economy just before the pandemic to understand the impact on the economy and workforce. We also need to understand the contrast between the 2008 and the current economic crisis. There is a world of difference.
The growth rate until 2008 had been 8% to 9% for four years starting from 2003-04 and investment was 38% of the GDP. There was enough fiscal space available in 2008 for the government to pump in money to revive the economy. We infused a fiscal stimulus of 4% of the GDP in 2008. We cut taxes and increased expenditure. I was in the Planning Commission and was part of the exercise.
Since this crisis began no taxes have been cut and there has been barely any increase in expenditure. Of the Rs 1.7 lakh crore ($22.4 billion) package that had been announced [before the latest one], around Rs 1.1 lakh crore ($15 billion) was frontloading what was already included in the budget for 2020-21. For example, if money was to be given to the elderly or widows as pension, it is being given in advance, or MGNREGA wages that were expected to be increased after a few months were increased early.
The COVID-19 economic fallout is worse than the global economic crisis of 2008. In 2008, the economic package was put together and implemented within weeks. The current crisis broke out in February and we are in the middle of May.
Till 2008, jobs in India were growing and so were incomes. India created 7.5 million new non-agriculture jobs every year from 2004-05 to 2011-12. This fell to 2.9 million between 2012 and 2018, and therefore the average household income stopped rising. During 2003 to 2013, the economy was growing at 8% despite the global economic crisis. In 2008-09, the growth rate climbed back up to 7% in just two quarters due to the financial package.
Since 2013-14 the government has claimed an average economic growth of 7%, which is lower [than it was before 2013-14]. No one really believes that this was [even as high as] 7%.
Why is it so?
If every determinant of growth was slower post-2014 than earlier, how can overall GDP growth be the same or faster than before?
The four engines of growth are export, investment, consumption and government expenditure. Merchandise export was at $315 billion (Rs 23.9 lakh crore) after having grown consistently until 2013-14. After this, there was negative growth and it rose again in the last year of NDA-I [the first National Democratic Alliance government, which came to power for a second term in May 2019] in 2018-19 to a level higher than that of 2013-14. Exports were contributing to 25% of the GDP in 2013-14 which had fallen to 17% in 2018-19.
Investment had shot up from 24% to 38% of the GDP between 2002-03 and 2007-08. By the end of 2013-14 it was 31% of the GDP, which fell to 28% in 2019-20. In the last quarter of the financial year 2019-20, the growth rate was 4% [due to the economic situation and lockdown].
Consumption expenditure had been running close to 60% but in the five years of NDA-I even that fell. This is not surprising because we have heard repeatedly that consumer demand is constrained. Demand did not increase because incomes had not been rising. People have tried to maintain their consumption by dis-saving as a proportion of the GDP which determines [that] investment fell from 24% in 2011-12 to 17% in the last year of NDA-1 in 2018-19.
On the government expenditure front, there has been a silent fiscal crisis since the beginning of last year. While the government had claimed our fiscal deficit to be 3.4% of GDP, the Comptroller and Auditor General had already made it public that the actual fiscal deficit was 5.8% of the GDP.
The corporate taxes were also cut in mid-2019. The government did not have any fiscal space when the COVID-19 crisis broke. For electoral reasons, the government had kept increasing the threshold at which personal income tax becomes payable every year over five years from Rs 2.5 lakh to Rs 5 lakh. So the number of personal income tax assessees fell from 60 to 15 million.
Meanwhile, corporate savings have risen from 9.5% to 11.6% of GDP (between 2011-12 and 2017-18), and corporations are either sitting on money or moving it abroad.
In short, all the determinants of GDP were doing worse, hence the GDP growth was slower post-2014. That is why job growth fell and unemployment rose to a 45-year high in 2018.
How can the government support millions of migrant workers if the pandemic cannot be controlled quickly?
Firstly, revive MGNREGA so that people have work to go back to. We need to start creating an architecture for cash transfer or put in place a minimum income guarantee. I think that 60% of rural and 46% of urban households must be covered under this. On a medium-term basis the transfer need not be more than Rs 500 a month [per household], which is the same as what was promised in the 2019-20 Budget under the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN). But the PM-KISAN scheme has a poor design because it is exclusionary and does not cover landless labourers. It is only for landed farmers, neither does it cover the urban poor.
However, the amount should ideally be Rs 1,000 a month until the economy begins to see some revival. The Nyuntam Aay Yojana [NYAY, a minimum income scheme for poorest households proposed by Congress party before the 2019 general election] was too generous, guaranteeing each household Rs 6,000 per month, which meant that the household could stop working altogether.
Madhya Pradesh, Uttar Pradesh and at least six other states have exempted businesses from labour laws for the next three years to beat lockdown setbacks. What will be the impact and repercussions of this?
I am not surprised about the extension of working hours. I think it will work in the interest of employers and workers because it is unlikely that any of these workers have been paid. Most MSMEs would not have paid their workers during the lockdown. The employer will try to recover lost output. The longer hours will help the workers recover what they have lost during the lockdown. It is highly likely that it will be repealed in a few months. [Editor’s Note: Uttar Pradesh withdrew its order to extend working hours on May 15, 2020.]
The government is in a process of revising all labour laws. Until 2014 there were around 45 labour laws, 10 of which were repealed by this government. Further, there were 100 state laws in addition to the 35 central laws. This made it difficult for employers, so labour laws were often breached. The problem got compounded as there were only 6,000 sanctioned posts of labour inspectors, half of which were unfilled.
It was good that the government decided to converge all these 35 laws into four codes. Three are still under consideration with the parliamentary standing committee. Practically, the state laws have been done away with by the state governments’ announcements.
Employers do not consider labour laws as a constraint to their activities or growth. Employers seem to have adjusted to these or found ways of getting around them. Labour laws were never implemented in either organised or unorganised sectors. For employers, the more important problems are power, infrastructure and logistics.
However, industries won’t see increased investments by merely setting aside labour laws. States like Madhya Pradesh and Uttar Pradesh have been sending labourers to other parts of India essentially because their own economies are agriculture-based. They are also states that do not have a reputation for good governance. The factories in these states will hire people if there is a demand for their products and services, not because labour laws have been relaxed.
How will labour rights be affected?
Labour rights will be adversely impacted without raising the number of jobs. If jobs do not grow, real wages will not grow either. The unemployment rate of 23% due to the lockdown is at a 45-year high, which means it has tripled in two years.
(Paliath is an analyst at IndiaSpend.)
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