Continuing threats to the economy

The second wave of coronavirus is further threatening the economy. There is a need to review the Budget proposals in the light of this development.

The challenge today is to restart the cycle of fast economic growth and employment generation that has been hit by demonetisation, GST and lockdowns. These actions have hit the small industries in particular. These same small industries were creating most of the employment. Thus, employment generation is no longer taking place, employment in our manufacturing sector is declining, less wages are being paid to the workers, there is less demand in the market, and businesses are less inclined to invest. We should not be misled by the booming Sensex. Big companies and e-commerce companies are doing well. But the economic growth is down because there is little purchasing power in the ground economy.

The government has tried to restart this fortuitous cycle by making increased investments in infrastructure. This would have been in the right direction if it would have led to the generation of employment. However, the investments in highways, airports and rail freight corridors is mostly being made by capital-intensive machines. Take the highways for example.

The land will be dug by an excavator. Cement will be purchased from the cement factory. The cement factory will use machines to dig the limestone. The cement will be transported in large trucks to the highways. The highway will be made by laying the cement by automatic machines. I reckon that only 15 percent of the government expenditure goes into the hands of the workers in the entire expenditure chain. The remaining 85 percent money keeps rotating on the top as if 85 percent oils is floating on 15 percent water. This money does not connect with the ground. For this reason, the growth rate of the economy is down and is not likely to revive from these investments. Making a shopping mall in the middle of a slum does not lead to an increase in the income of the slum-dwellers.

The present infrastructural investments will not help the economy for another reason. It is beneficial to make a highway if trucks are waiting to ply on them. Our growth rate has been declining over the last six years. The demand for the infrastructure that is being created is less. The toll-ways may not be able to recover their investments in absence of trucks plying on them.

Indeed, Surface Transport Minister Nitin Gadkari has said that the toll collections in 2020-21 have been higher than in 2019-20. I think this s because more toll-free roads have been brought under toll. However, these investments will certainly prove beneficial in the long run. But, as famous economist John Maynard Keynes had said, "In the long run we are all dead." The need was to create demand in the economy immediately. Indeed, demand for steel and cement in the making of highways will not jumpstart a fortuitous cycle because there will be less employment of workers, less generation of employment and less connection with the ground economy. I am not opposing increased investment in infrastructure. That is certainly needed. I am opposing the particular investments in big highways made with automatic machines. Need was to make small town roads with labour-intensive methods.

The need was to also to support small businesses that employ large numbers of workers. This could be done by increasing the import taxes on items like cloth and rubber chappals that are produced by small industries; and also increasing the rates of GST on large factories making these items. That would have enabled small industries to sell their goods in the market. We must accept that this would lead to an increase in the price of these goods in the market and force the consumer to buy expensive goods made by small industries.

This additional burden on the consumer must be thought of like an "employment tax." The protection provided to small industries would have led to the generation of employment which, in turn, would have created demand in the market. Just as a person who has overcome a sickness needs to be given tonic to revive his working capacity, similarly, the small industries that have just faced the triple problems of demonetisation, GST and lockdown need to be given the tonic of protection to revive their working.

A positive step taken by the government in the Budget is to monetise the infrastructure projects like highways, electricity transmission lines, rail tracks, ports, airports, etc. The government plans to either privatise these completed projects or give them out on contracts and raise money. The money raised can be used to invest in other infrastructure projects that are limping due to financial crunch. It would be better though if these new investments were to be made in labour-intensive projects as mentioned above.

The government has planned to privatise a number of Public Sector Enterprises (PSEs) like Air India, Shipping Corporation of India, IDBI bank, Bharat Earth Movers Limited, Pawan Hans and other companies. The government has made a target of raising Rs 1.75 lakh crore in the current financial year which is nearly ten times the Rs 20,000 crore generated from this head in the present financial year. It is not impossible though it is difficult to raise this huge amount.

The Finance Minister has estimated in the Budget that the fiscal deficit in the present year 2020-21 will be 9.5 percent of our GDP. The government has placed a target of fiscal deficit of 6.8 percent in the coming year 2020-21. This estimate is based on the assumption that the economy will rev up and Rs 1.75 lakh crore will be obtained from disinvestment.

The second wave of corona pandemic despite the vaccination drive puts the attainment of these estimates in much doubt. The economy can face another crisis in that situation. The government will have to borrow large amounts to cover this deficit. This borrowing can be made from the Reserve Bank of India or the market. The economy will face price rise if the Reserve Bank prints notes and lend the money to the government. On the other hand, interest rate will increase if the government borrows this money from the market. The economy will suffer in both cases.

(The author is formerly Professor of Economics at IIM, Bengaluru)