Increasing public investment and employment remains a moral imperative for finance minister Arun Jaitley
Union finance minister Arun Jaitley is probably caught in a cleft stick. With demonetisation throwing a spanner in the works, his fourth budget will understandably try to achieve a balance between reviving economic growth and maintaining fiscal stability. These are two seemingly conflicting goals, with economists sharply split on both sides of the divide. The fiscal responsibility and budget management committee is also believed to have drawn some red lines. But Jaitley may not have much of a choice.
There are two ways to revive growth: either through consumption or through investment. Export-led growth could have been another possibility but India’s persisting trade deficit and the world economy’s delayed recovery makes it a non-starter. With demonetisation squeezing out demand, there could be attempts to stimulate consumption through some restructuring in direct taxes and some realignment of indirect tax rates (especially excise) on goods, in line with the proposed goods and services tax slabs. The clamour for fiscal rectitude, especially the threat perception posed by credit rating agencies, might stay Jaitley’s hand from over-stretching.
The other alternative is government’s capital expenditure, because demand compression is also likely to suck out the private sector’s desire to invest. However, there are valid concerns over the government’s ability to execute projects efficiently and within budgeted costs. Road minister Nitin Gadkari’s recent admission of highway construction falling short of desired targets reflects both private sector lassitude in taking up infrastructure projects and the government’s less-than-stellar record in project execution.
|File photo of finance minister Arun Jaitley; photo courtesy: Reuters|
At a pre-budget seminar in Mumbai, former Reserve Bank of India governor C. Rangarajan said public investment amounts to roughly 7% of gross domestic product (GDP), with the Centre and the states (collectively) accounting for 1.6% of GDP each and public sector units contributing the balance 3.8%. If quality of execution is a concern, there’s a proposal to re-route part of the Centre’s public investment to public-sector units (PSUs) as equity which, leveraged with bank loans, can be used for greater impact. It’s not the best, or ideal, solution, but it sounds workable.
A section of economists and demonetisation supporters claim that penal taxes collected through the two-tranche income-disclosure scheme are likely to provide Jaitley with elbow room to stretch his capex budget without upsetting fiscal targets. And though that is serendipitous (Rs15,000 crore is expected from just the first tranche), the question arises whether Jaitley would allocate a higher capex outlay even in its absence.
Interestingly, increased capital expenditure meets three objectives simultaneously: reviving economic growth, visible progress towards meeting the UN’s Sustainable Development Goals (SDGs) and implementing some of the campaign promises made by Prime Minister Narendra Modi during the 2014 general election.
India is a signatory to the UN’s SDGs, which succeeded the Millennium Development Goals. The SDGs cover 17 broad goals (incorporating 169 related targets) to be achieved by 2030. The SDGs have been framed with the singular purpose of achieving three overarching objectives: ending poverty, protecting the planet, and ensuring prosperity for all. The Planning Commission’s successor, NITI Aayog, has been entrusted with mapping the targets with different ministries, coordinating with them and helping the government meet the targets.
Goal 9 of the SDGs says: “Build resilient infrastructure, promote sustainable industrialization and foster innovation.” More importantly, this is directly related to Goal 8: “Promote inclusive and sustainable economic growth, employment and decent work for all.” This goes directly to the heart of the debate between fiscal hawks and those wanting the government to expand public investment for kick-starting growth; it also provides a compelling reason for the government to increase outlays for public expenditure.
Employment growth remains stagnant across the world. A joint study (goo.gl/ZvLcsf) by the International Labour Organization, the World Bank, the International Monetary Fund and the Organisation for Economic Cooperation and Development found employment elasticity (the direct relationship between employment growth and economic growth) in most G20 countries is low, giving credence to claims of “jobless growth”. India’s employment elasticity is said to be close to zero. A 2014 working paper by RBI staffers (goo.gl/U09o8b) has also pointed out how employment elasticity has declined in the post-reforms era, especially in the manufacturing sector.
The Bharatiya Janata Party’s (BJP’s) 2014 campaign manifesto promised to create new employment opportunities: “A strong manufacturing sector will not only bridge the demand-supply gap leading to price stabilization, but also create millions of jobs and increase incomes for the working class.” There were also commitments to create jobs in the small-scale sector, agriculture and agri-related industries. Unfortunately, the narrative in many states with high unemployment rates has changed thereafter.
So far, official data and anecdotes both indicate demonetisation-induced livelihood stress in urban and rural areas. People have lost jobs across manufacturing, service and agricultural occupations. Whether BJP wins or loses the approaching state assembly elections, increasing public investment and employment remains a moral imperative.
The above article was published in Mint newspaper on January 25, 2017. It can also be read here