There are only a few days left for this year’s Union Budget to be unveiled. By now, the Budget papers have been finalised and possibly even proofread. The draft of the Finance Minister’s speech is also likely ready and waiting for the finishing touches and final flourishes to be added. The speech needs to strike the right notes of optimism, though there is little for her to be optimistic about. The Finance Minister’s job is quite unenviable even in the best of times, and after two years of the pandemic, it has become infinitely worse.
While she has had some reason to feel cheerful of late because of the rebound in economic growth and better-than-expected tax collections, the rising crude prices threaten to spoil any celebrations that she may have planned.
In most years, the number of commentators who want the Finance Minister to go the whole hog on growth and spend freely and those who champion fiscal prudence and thrift is almost equally divided. This year, however, despite the record fiscal deficit, the majority of economists and opinion writers have advised the Finance Minister to focus on growth, even if that means taking a longer path to fiscal consolidation.
India's Lopsided 'Recovery'
There are good reasons for that. After two years of the pandemic and despite the smart growth registered this year, the size of the Indian economy in real terms at the end of the fiscal is likely to be just marginally more than what it was two years ago. Though the Indian economic growth declined every quarter since 2018, the hit to the GDP in FY20 because of the pandemic was far greater than anyone had originally thought, leading to the biggest economic contraction since Independence.
And that is why every economist is rooting for the Finance Minister to ensure that the growth momentum is not stalled, even if that means a longer time to achieve the fiscal deficit target of 4.5% of GDP by 2025-26 as the glide path that it had hoped to follow earlier.
But it is important for the Finance Minister to realise that it is not just growth that is required. The structure and the composition of the growth are perhaps even more important than just GDP growth numbers. Most of the data that have come in have pointed to one fact: in the sharp recovery this year, the growth has been entirely lopsided – or to use the economists’ alphabet soup, it has been a ‘K-shaped’ growth.
A Dismal Employment Rate
Big listed companies have gained disproportionately in the economic recovery. Several analyses of listed company results have shown that they improved their revenues and profits while reducing costs. Many of the companies have taken the opportunity offered by lower interest rates and excess liquidity to also reduce their leverage.
On the other hand, a vast majority of the people – especially the middle-income groups and the poor – have not been included in the recovery.
Unemployment remains high, and worse, the employment rate as well as the labour force participation rate (LFPR) has worsened during the pandemic.
Our employment rate is today worse than most countries, barring some of those in the Middle East and in North Africa.
Savings Down, Debt Up
Given that the country was combating the highest unemployment rate in 45 years before the pandemic, this is bad news. Various surveys have also hammered home the point that a large number of people have seen their incomes shrink during the two years of the pandemic. The Reserve Bank of India has, from time to time, highlighted that the savings rate is coming down while personal debt is going up.
How that has affected the composition of the economic recovery can be seen in the details given by the first advance estimates of the GDP for FY22 brought out by the Ministry of Statistics and Programme Implementation (MoSPI) earlier this month.
Private consumption – which has been one of the major drivers of economic growth in India for many years – had slowed before the pandemic. And despite the smart recovery this year projected by the advance estimates, the private consumption for FY22 is likely to remain below the levels seen in FY19.
Higher consumption by a small number of well-off people who have gained in the recovery cannot make up for the reduction in spending of the vast majority who are tightening their belts.
A Broad-Based Growth Is Crucial for Recovery
If the Finance Minister has been studying the structure of our GDP growth for the past few years, she would have noted another worrisome trend. Despite the government’s many efforts to prod the animal spirits of the business fraternity to come out of hiding – including tax benefits and production-linked incentives – the private investment sentiment as seen in the gross fixed capital formation (GFCF) trends has been rather lacklustre. One cannot blame the corporate sector for that either. Capacity utilisation numbers of the last few years show that there is not much case for investing in new capacities in a host of sectors, though not all.
For the Finance Minister, ensuring conditions that lead to a more broad-based growth is extremely important for multiple reasons. Apart from helping private consumption recover, it would also help her reduce some food subsidies that are required to help people out of extreme distress. And that is why she needs to figure out how to not just ensure higher growth, but also that its benefits cover a larger proportion of the population than it does now.
(Prosenjit Datta is a former editor of Businessworld and Business Today magazines. He tweets @ProsaicView. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)
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