Macro-economic Policies to Reverse the Slowdown of the Indian Economy: Need to Prioritise the Social Sectors

In recent months, the Government of India’s macro-economic policy has acquired a great deal of importance in the context of various suggestions for putting the Indian economy back on a sustained higher trajectory of growth. The policy currently being followed by the Government of India is intended primarily to incentivise potential investors, both domestic and foreign, by facilitating ease-of-doing-business and making large-scale concessions to the corporate sector. In this context, the Government of India is taking credit for the relatively higher, though by no means spectacular, inflow of foreign private capital and India moving several steps up in the ladder of ease-of-doing-business. The tax concessions given to the corporate sector in the last budget are estimated to amount to more than ₹1.40 lakh crore.

Besides, various limitations on foreign investments are being relaxed or removed. Industries reserved for development in the public sector are being fast opened up for private, including foreign investment. Restrictions on the proportion of private holding and control over the running of industries are being removed. Conditions laid down to serve social objectives and help in indigenisation are also being progressively jettisoned. In spite of these measures, there is no evidence of any significant increase in investment by the private sector. This is obviously because in the absence of demand companies are unwilling to make investment in spite of all the incentives being provided to them.

Economists who are in favour of the above development strategy would like the government to go further and implement other items on their reform agenda such as labour market liberalisation and removal of constraints on acquisition of land for industrial purposes. In their advocacy, these economists brush aside the negative impact such reform measures are likely to have on the incomes, living conditions and the economic security of the workers and the agricultural class. They also refuse to concede that the policy of hiring and firing of labour will be counterproductive as it would squeeze demand further in a situation of huge demand deficit.

Some economists in the above category are also advocating acceleration of investment in the building of infrastructure for generating additional income and for creating conditions for stimulating investment in general. No sensible person will oppose additional efforts to build infrastructure which continues to remain awfully deficient in the country. But while talking about infrastructure, these economists mean only physical infrastructure in the domain of transport and energy. They hold no brief for investment in human infrastructure such as education and health and for enabling the common citizens, particularly the marginalised groups among them to meet their basic needs guaranteed under the Indian Constitution. Besides, we must remember that investment in physical infrastructure is not as labour intensive as that of other sectors and that large-scale projects in this field have long gestation periods.

Professor Abhijit Banerjee, a co-winner of the Nobel Prize in Economics, has been one of the few economists of repute making a case for transferring income to the poor who are likely to spend the additional income for buying goods and services, an enhanced production of which offers the best chance for reversing the current slowdown. In this connection, he has singled out the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) and direct income transfers to the poor. But even he has not mentioned the potentiality of investment in the social sectors such as education and health for creating demand by way of opening avenues for large-scale employment in order to stimulate growth in the short run and impart sustainability to the economy in the medium and long run.

An article written by former Prime Minister Dr Manmohan Singh on the subject and published in The Hindu on 18 November 2019 has attracted a great deal of attention. According to Dr Singh, the main factor responsible for the current sorry state of the Indian economy is lack of confidence among those who can invest. In listing out those among whom confidence needs to be created, he refers specifically to investors, entrepreneurs and the business class. This is one point on which the present government cannot be faulted. It has sought to take the programme of the UPA government to incentivise the corporate sector to its logical conclusion with maximum speed. In this there is hardly any difference between the macro-economic policy of the present government and that adopted by the UPA government. It was therefore not surprising when Professor Banerjee characterised the development strategy followed by the present government during the period 2014–2018 as UPA–III.

It is widely recognised that the social sectors in India are grossly underfunded. No mainstream economist or policymaker has come out with a suggestion for enhancing expenditures in these sectors to a level close to what is really required. On the contrary, they have taken the view that public expenditure in these sectors depends upon the resumption of the path of a high growth rate, which will make additional revenues available to the government, enabling it to enhance the level of public expenditure in the social sectors. Thus, these economists and policymakers have made expenditure in social sectors conditional upon a higher rate of growth.

There is very little justification for establishing such a relationship. Expenditures in social sectors are designed to ensure the exercise of fundamental rights available to the citizens under the Indian Constitution. Among expenditures for the realisation of the fundamental rights, investment in social sectors alone cannot be singled out for being made conditional upon an increase in the rate of growth, while several other sectors, such as national security with its vast ambit—which have a bearing on fundamental rights, have first or priority claims on the budgetary resources of the government.

Most mainstream economists and policymakers also believe that expenditure in social sectors can only have a long-term impact on growth and what is now needed is macro-economic policies which can have an immediate or very short-term impact. This belief is deeply flawed as it can be demonstrated that increased expenditures in social sectors in the magnitudes required for meeting the constitutionally-mandated objectives can have a short- and medium-term effect of enhancing employment, generating demand and attracting investment.

Let us take the example of the impact of investment in school education on employment and hence demand creation. The Right to Education Act (RTE) sets out the objective of universalising elementary education in five years. The National Education Policy, 2020 states that the Act ‘will be reviewed …. to ensure that all students …. shall have free and compulsory access to high quality and equitable schooling from early childhood education (age three onwards) through higher education (that is, until Grade 12).’ We, at the Council for Social Development, have calculated the magnitude of demand creation by meeting just one condition for realising this objective, that is, employment of teachers. We have arrived at a figure of 5.7 million teachers by taking as the base the total number of children going to school from the 2011 Census, adjusting it appropriately for rate of growth in population since then, dividing these numbers by the pupil–teacher ratios fixed for each level of schooling, and deducting from it the number of teachers currently employed, obtained from the Unified District Information System for Education data. (As there is no officially prescribed pupil–teacher ratio for children in the 3–6 years age group, we have assumed a ratio of 10:1).

The recruitment of 5.7 million additional teachers over a period of, say, five years, can create a huge scale demand. And, this is only one factor essential for universalising quality school education. There is also a large gap between requirement of infrastructure in the schools and that available and built recently. According to recent government data, only 12.5 per cent of the schools covered by the RTE Act were compliant with RTE norms, most of which related to infrastructure. Fully implementing these norms at the level of elementary education and extending them, in a suitably modified form, to secondary and pre-primary education has the potential of generating demand on a large-scale.

Similarly, in the health field, there are a vast number of vacant posts for professionals at different levels. There is a huge deficit of paramedical workers, middle-level health workers, nurses and trained doctors. This is evident from the long queues of patients to avail themselves of the services provided in the presently ill-equipped and inadequate primary health centres and government hospitals.

The fact that health and education are of instrumental value in driving growth, creating employment and improving people’s wellbeing is widely recognised but often forgotten when it comes to making investment in these sectors. Education has a crucial role to play for an individual for gaining employment and retaining employability. Available data suggest that those with good education are the main gainers from the opportunities created by globalisation. If we compare 2011 and 2017–2018 data relating to employment and quality of jobs, the gap in educational attainment emerges as the single most important factor separating the gainers from the losers of the high rate of growth during this period.

Health and education have been widely recognised as public goods. In most developed and several developing countries, these services are either provided free or are heavily subsidised by the state. Unfortunately, in India, we find the opposite trend of the state withdrawing from the provision of these services and consequently their rapid privatisation. In fact, the government has a well-entrenched policy of encouraging privatisation in both health and education. Privatisation in these sectors has not led to efficiency or improvement of quality. It has destroyed public sector institutions in these sectors, promoted greater inequality and pushed the poor out.

One of the widely publicised schemes of the present government for creating employment is the skill missions programme in order to bridge the skill deficit. However, in the absence of good general education, these missions have not produced the desired results in spite of the channelling of large amounts of resources into the skill development programmes.

The gestation period of projects in the social sector is not as long as it is made out to be. This is particularly so in the health sector where massive investments for reviving public institutions which have decayed and for training medical, paramedical and health management personnel can bring immediate benefits to the suffering masses, stabilise their incomes and enhance their contribution to the overall development of the country. Coming to education, after all in the RTE Act a gestation period of only five years was envisaged for universalising quality education at the elementary stage. If the legally mandated schedule of five years for the implementation of the RTE Act would have been adhered to India would have by now a millions-strong army of well-educated young girls and boys—the most potent instrument for accelerating and sustaining growth. Withdrawal of the state from provisioning of the public goods of health and education services has been the most important factor accounting for the dissipation of the dynamism of the Indian economy. It is therefore time for reprioritising education and health in the scheme of development strategy and the allocation of budgetary resources.

Massive investment in the social sectors, particularly health and education, need not be at the cost of other schemes which are employment intensive and which have the potentiality of creating demand on a large-scale in the short and medium run. MNREGA figures most prominently among these schemes. It is believed that the employment created and hence the income generated under MNREGA played the most important role in mitigating the adverse impact on the Indian economy, of the global economic and financial crisis of the years 2008 and 2009. The income generated by MNREGA is spent mainly by the lower income strata of the rural sector, but indirect income is generated through the multiplier effect not only by the spending of the people belonging to the lower income strata but also by the middle and higher income groups in both rural and urban areas. Poor people have a high propensity to consume and generate demand for consumption of goods and services, the production of which is carried out mainly by people belonging to the middle and top income groups. Therefore, the coverage of rural MNREGA should be expanded and it should be extended to urban areas. But, as it happens, even the present incarnation of MNREGA is choked by a financial squeeze by the government. The demand for work under the scheme is increasing every year. There is scope for investing about ₹1.30 lakh crore in rural MNREGA even in its present form. Moreover, there is a payment liability to the workers every year by about 20 per cent. So, when the allocation comes for the next budgetary year, the first claim on it is the 20 per cent of carry-over liability. This arrear continues year after year.

A recent disturbing trend has been that young persons, between the age group of 18 and 30 years, are coming to work under MNREGA. This shows the distress level in the employment market. This distress can be mitigated by innovatively designing MNREGA so that educated persons can work in this programme. For this, the essential first step is to extend the scheme to the urban areas. The MNREGA wage rate is lower than both agricultural wage and open market wage rates. In some states, the gap is quite significant. If these rates are increased, larger numbers of the unemployed in the rural areas would join this scheme.

Besides, the government should speedily go about creating employment by filling in vacancies amounting to nearly 200 million in the central and state governments. If these vacancies are filled on a priority basis, they will immediately generate demand in the economy on a significant scale.

The other important mechanism to create large-scale demand in the short and medium run is direct income transfers to the poor. The two schemes announced for this purpose on the eve of the last general elections were the Nyuntam Aay Yojana by the Congress and the PM Kisan Nidhi Samman Yojana by the BJP. As the Congress did not come to power, the Nyay scheme remained only on paper. On the other hand, resources made available to the poor under the PM-Kisan are grossly inadequate and hence fall short of imparting any significant stimulus to the growth of the economy. The other schemes which provide vast scope for creating demand relate to social security and food security. There are legislations obliging the government to provide security to citizens in both these critical areas. But these Acts are yet to be implemented properly.

A question frequently raised is: from where will the resources for massive investments in social sectors and in schemes which can create demand on a large-scale come? The answer to this question is not difficult to find. One can pose the counter question: how did the government mobilise the resources for providing incentives to the corporate sector amounting to over ₹2 lakh crore per annum over the last few years and for the cuts in the corporate taxation which is likely to result in a foregone revenue of ₹1.40 lakh crore? One may also ask: how will the government mobilise resources for its publicly announced plan of investing ₹100 lakh crore in the next five years for building physical infrastructure? Thus, the issue essentially is not of paucity of resources but the priority set by the government for utilising resources at its disposal. And obviously, the priority is to make additional incomes available to the corporate sector which, in the absence of demand, is unlikely to be interested in investing.

At the same time, it is also true that for the last 30 years or so, the government has not made any effort to mobilise domestic resources on the scale needed for stimulating and sustaining growth at the optimum level. The tax ratio in India at the level of 11.7 per cent is one of the lowest in the world. Some 93 per cent of the corporate sector companies do not pay any tax or pay very little tax.

The success of the government’s drive towards modernisation has been predicated on inflow of private foreign capital. The whole argument of successive governments seems to have been that foreign investment will come, close the infrastructure gap and lead to the development of the manufacturing sector as though such investment is driven by altruistic motives. But the fact is that foreign investment in India has played a marginal role in closing the resources gap, though it might have served some strategic purposes.

The origin of the current economic slowdown can be traced to the early 1990s when full-fledged liberalisation was introduced, public sectors came to be dismantled piece by piece and sector by sector and the process of withdrawal of the government from the provisioning of public services started. This was not warranted by the diktats of the neoliberal development strategy. Adam Smith, the father of liberal economic thinking, recognised the critical role of governments in providing public goods. Almost all developed and many developing countries which have resorted to neoliberalism have invested adequately for supplying the public goods of health and education. As Amartya Sen and several other economists have brought out with the aid of empirical data, investment in education and health has been the main factor accounting for the success of the neoliberal development strategy in these countries. India has unfortunately been an exception to this historical trend. This has been at the cost of the efficiency and competitiveness of the Indian economy and has resulted in the denial of basic human rights to the teeming millions in the country.

We are familiar with the phenomenon of jobless growth associated with the current phase of globalisation. India too, between 2004–2005 and 2013–2014, attained higher rates of economic growth with little job creation. Between 2014–2015 and 2017–2018, a relatively lower rate of growth was accompanied with very low or negative employment growth. Elasticity of employment which was 0.57 in the mid-1970s, 0.45 in the 1980s and the early 1990s, dropped to 0.09 between 2009 and 2015. The rate of unemployment which used to be less than 3 per cent a few years ago has shot up to 6 per cent recently. The labour force participation rate fell sharply from 43 per cent in 2004–2005 to 36.9 per cent in 2017–2018. In the unorganised sector, this decline was really precipitous. In recent years, the Gross Value Added (GVA) has increased in manufacturing and services sectors but it has so happened only with the non-wage part of the GVA, while wage part in the GVA has been squeezed. Both the urban and rural wages have gone down leading to a decline in total demand and consumption in the economy. This is a major factor behind the current demand crisis.

––Some parts of the article draw upon the data and findings of research work done in the Council for Social Development.