As finance minister Nirmala Sitharaman unveils her budget, she confronts an economy scarred by increased informality in the labour market, a shrunken micro, small and medium enterprises (MSME) sector, and economic activity moving to large firms who are incentivised to generate profits rather than employment. (Sanjeev Verma/HT PHOTO)
As finance minister Nirmala Sitharaman unveils her budget, she confronts an economy scarred by increased informality in the labour market, a shrunken micro, small and medium enterprises (MSME) sector, and economic activity moving to large firms who are incentivised to generate profits rather than employment. (Sanjeev Verma/HT PHOTO)

Budget 2021 mantra: Spend and empower states

The direction of post-Covid recovery is skewed. The FM must prioritise employment generation and social security for the vulnerable through increased spending
By Yamini Aiyar
UPDATED ON JAN 30, 2021 04:46 AM IST

There is one, and only one, metric on which the forthcoming Union Budget should be assessed — the roadmap it offers for reversing the widening structural inequality in the economy, sharply visible in the direction that India’s post-lockdown economic recovery is taking.

By all indicators, economic activity in the formal economy is nearing pre-pandemic levels, the sensex is booming, and the National Statistics Office (NSO) advance estimate of a 7.7% contraction is, ironically, an optimistic prognosis compared to a few months ago. However, the dynamics of recovery are sobering. Large listed companies have experienced a 50% (year-on-year) growth in profits, fuelled by cost restructuring and pent-up demand of households in the top income deciles. Small listed firms, informal firms and the bulk of India’s workers, however, are yet to recover from the Covid-19 shock.

In fact, large firms have profited partly, as economist Pranjul Bhandari has pointed out, at the cost of small firms whose ability to respond to lockdown-imposed logistical and supply constraints was limited, thus resulting in a shift in spending toward large firms. And as Bhandari points out, smaller firms have experienced higher cuts in staff costs. The consequences of this large firm, profit-led recovery on the labour market is visible and worrying.

According to the Centre for Monitoring Indian Economy (CMIE) data, in December 2020, India had 14.7 million fewer jobs than in 2019-20. This headline number masks structural shifts in employment patterns. First, employment is increasingly informal. Analysis of CMIE data by Amit Basole and co-authors from the Azim Premji University highlight that 40% of salaried workers and 42% daily wage workers moved into self-employment in August 2020, a pattern that persisted into December 2020. Most of India cannot afford the luxury of unemployment. This mostly informal, subsistence level shift to self-employment is a direct result of a lack of employment opportunities.

Second, employment recovery is marked by gender differences, with female employment taking a serious hit. Seventy-three per cent of men who lost employment in April found employment and stayed employed till December 2020, while only 23% of women stayed employed till December. Third, as evidenced by several surveys including CMIE, wages have fallen significantly below pre-lockdown levels. More starkly, Basole and his co-authors estimate that the bottom 10% of India’s households lost 30 percentage points more of their income than the top 10% in the first six months of the pandemic.

The writing is on the wall. The economic devastation caused by the lockdown has been disproportionately and inequitably borne by the poor and vulnerable. The government’s stubborn refusal to loosen its purse strings and provide support (rather than expand, government expenditure contracted, picking up only in November 2020), and instead rely on monetary policy levers, has meant that structural inequalities have only widened.

As finance minister Nirmala Sitharaman unveils her budget, she confronts an economy scarred by increased informality in the labour market, a shrunken micro, small and medium enterprises sector, and economic activity moving to large firms who are incentivised to generate profits rather than employment. Current patterns suggest that growth in FY 22 risks being labour-displacing rather than labour-absorbing. Reversing this trend is both a moral imperative and good economic sense — after all, if purchasing power remains low for the bulk of the economy, demand will collapse.

The only direction for the budget to move in, therefore, is to prioritise employment generation and social security for the vulnerable through increased spending. Significantly expanding the Mahatma Gandhi National Rural Employment Guarantee Scheme budget; making the public distribution system demand-driven; and allocating funds for expanded urban social security (leaving states to decide whether this should take the form of cash, employment or insurance) are urgent and necessary expenditures. In addition, the budget should ensure that curtailed expenditure in FY 21 for key welfare schemes — nutrition, education, housing — are fulfilled. There is little room in a budget to address the many structural failures that have led us to the current employment crisis but signalling a long- term policy vision will be a welcome step.

Several interlocutors have called for increased infrastructure expenditure as a critical instrument both for reviving private investment and providing employment. But should the infrastructure push be fuelled by the Centre or states? States have been at the frontlines of the Covid-19 battle, with their revenue streams battered by the pandemic and the Centre’s insistence on increased market borrowing rather than fiscal support to meet their expenditure needs. In response, as a recent CRISIL ratings report has highlighted, states are likely to significantly cut capital expenditure or resort to off-budget borrowings.

There is, thus, a strong case for empowering states with requisite fiscal support to lead the infrastructure push. This would mean honouring tax devolution commitments made to states, something that the Centre has failed to do throughout the 14th Finance Commission period, and providing states with supplementary Covid-19 grants particularly if, as is widely speculated, the 15th Finance Commission reduces tax devolution to states.

Finally, a budget being presented against the backdrop of Covid-19 will necessarily have to make provisions for India’s broken health system. Increased allocations are indeed welcome and necessary, but the Centre will be well-placed to remember that health is a state subject. To the extent that the budget is a policy document, it should lay out a broad direction and outcomes backed with finacial outlays, leaving states to chart their own course.

Spend and empower states — this should be the mantra for India’s post-Covid-19 budget.

Yamini Aiyar is president and chief executive of the Centre for Policy Research The views expressed are personal

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