The budget session of the parliament is going to start in a few days and the budget for FY 22-23 is going to be presented on 1st February, 2022. Let us examine what are the major impending issues faced by the Indian economy and what are the challenges, the budget needs to address. We will focus on various issues in front of the economy in a series of articles in the run up to the budget.
The most important question today is that has the economy hit the path of recovery from the impact of the pandemic. The true sense of recovery can be measured when we compare the economic indicators now with the ones in the pre pandemic period (FY 2019-20).
The Government of India released the advanced estimates of National income 2021-22 recently. The GDP growth of the current financial year when compared to the pre pandemic period stands at 1.26%. Thus it can be said that the economy has at least reached the pre pandemic level and is in the path of recovery.
But is this recovery uniform across all section of the economy. Many economists argue this to be a K shaped recovery with the affluent section of economy steadily growing and thieving into the path of the recovery, while the vast majority is facing a sharp decline and are seeing de growth. Let us examine this in the light of the advanced estimates released by the Government of India.
Consumption expenditure is a indicator of the demand in the economy. According to the advanced estimates FY 21-22, the private consumption expenditure declined by 2.9% when compared to the pre pandemic period. Thus overall there is lesser money spend by people leading to the de growth. But during the same time, the import has seen a increase by 11.8%. Now a part of imports will be industrial imports. But there will also be a sizeable section of import which are for consumption. Now import related consumption are generally for the luxury goods.
So it can be inferred that when compared to pre pandemic period, while the overall consumption in the current FY has witnessed a sizeable decline ( 2.9%), the consumption of the luxury goods has actually shown an increase ( loosely defined based on imports). So while the affluent section’s consumption is rising there has been a decline of the same for people at large. This is definitely indicating towards a K shaped growth as argued by many economists.
The same can be corroborated from other data about Indian economy. The Oxfam report, “Inequality Kills”, released on 16th January, 2022 shows that in 2021, while the income of 84% of Indian population has declined, in the same period the number of billionaires has increased from 102 to 142. Moreover during the same period when the collective share of wealth of100 richest people has grown to a record high, the bottom 50% of the population was holding mere 6% of the total wealth. Also there has been a huge section which has been hit by poverty with India now accounting for almost half of the total poor of the world.
So one of most important issues in front of the economy today is the growing inequality and this K shaped recovery with the vast majority of the economy is actually seeing a de growth. One possible reason for this unequal recovery can be attributed to the fact that since 2016, may be partly by design, the informal sector of the economy which accounts for employment of almost over 90 percent of the economy is shrinking and the formal sector is rising. But the formal sector is not absorbing in same proportion of people which are coming out of the informal sector. Thus leading to increase in unemployment and also increase in inequality. The CMIE data shows that unemployment as of December stands at 8%.
So the two most major issue in front of the finance minister today are the growing inequality and the high unemployment. It has to be seen how these issues are addressed in the budget. Let us examine what are the possible options in front of the ministry today. One of the possible way can be to continue focusing on increasing the capital expenditure of the budget across different areas. This will mean more money for infrastructure growth leading to more employment in the economy. A major boost in this area is perhaps the need of the hour.
The other focus area can be the MGNREGA scheme which guarantees 100 days of employment for rural population. There needs to be a focused allocation in this scheme to ensure guaranteed employment. There has been reports mid year in terms of increased allocation in MGNREGA over and above the budgetary allocation. IPD sincerely hopes that the budgetary allocation increases in this area. Also as the economy has seen growing urbanization over the years and there has been a huge section of unemployment created in the urban and semi urban areas, perhaps one possible option to address this is a similar scheme as MGNREGA for urban areas focusing on 100 days of guaranteed employment.
One other area which has been in contention since the economy has hit the slowdown is cash in hand of certain section of the economy. There are fiscal challenges which also needs to be balanced but given the growing inequality that can be an option. Also cash transfer might not be direct, it can be through the guaranteed employment schemes. It needs to be seen whether the government takes any of these routes or not.
In the next article of this series we will focus on the investment or gross capital formation as this is the second biggest component of GDP after consumption