Reflections on India’s economic scenario
This New Year brings with it a sense of hope and expectation related to issues that will garner great attention, even as things improve. I write this column reflecting on some of the issues of the year gone by.
The state of the economy has been an area of concern even during the pre-pandemic period. Covid-19 revealed the fault lines in the economy, especially within the manufacturing and the construction sectors, with their high-dependence on migrant labour. However, things now seem to be better on the economic front, with both the World Bank and the IMF projecting growth rates for India in 2021–22 and 2022–23. This will place us among the fastest-growing economies in the world.
The government will need to attend to the disruptions in education, employment and income among the poorest sections of the society. While attention to pruning revenue expenditures are in the right direction, spending on initiatives like the MGNREGA would still be necessary to ensure more inclusive growth. The lower-budgeted expenditure on MGNREGA for fiscal 2022 compared to fiscal 2021 thus raises concerns of the equitable nature of growth to be sustained.
We witnessed the collapse of India’s healthcare system during the pandemic and the burden imposed by large, out-of-pocket spends for a vast majority of the country’s population. It also revealed the gaps in rural health infrastructure and the vulnerability of the rural population. With a public health expenditure that has ranged between 1.2% and 1.8% of the GDP since 2008–09 to 2021, it is clear that the government will need to incorporate these relatively ‘silent’ agenda issues in its long-term planning. A mere obsession with growth numbers may be undesirable and counterproductive.
As the year turns, one expects growth to be restored, even while inflation is kept under control. This may be a pipe dream given that international fuel prices have driven fuel inflation to the highest ever rate of 14.3% (in October 2021). Also, raw material prices are high. This coupled with the fuel inflation, high transportation costs and global logistics and supply chain bottlenecks will drive core inflation in the new year. In addition to these, the expected inflation (CPI-C) in March 2022 could be higher than 5%.
The differential impact of such inflation on growth prospects of different types of businesses will need to be considered by the government. The Micro, Small and Medium Enterprises (MSMEs) have been particularly impacted by raw material price increases. Given the slack in the economy, they cannot raise prices of their own products to compensate for high-input prices. Moreover, with raw material inflation exceeding 100% in the case of crucial inputs like aluminium alloy, copper, kraft paper and engineering plastics, the MSMEs would find it difficult to execute their orders taken at much lower prices. The contracts signed by MSMEs with Public Sector Units (PSUs) imply that they would be blacklisted for non-execution of orders. The government will need to help MSMEs face such pricing challenges through soft loans while at the same time allowing for renegotiation of contracts.
India’s Current Account Deficit (CAD), which had turned positive for the first time in 17 years in 2021, was the high point of FY 2021. Such gains were on account of a contraction in import demand driven by the pandemic. As the economy recovers, and commodity prices surge, such gains in CAD will be lost in the fiscal year 2022.
Loss of jobs during a pandemic-led recession, as witnessed in India, was to be expected. Even as employment growth has started looking up in the last few months, it is important to track employment to see where it is being created. An increase in agricultural jobs would simply imply an increase in the number of people who are disguisedly employed. The recent trends in employment suggest an increase in rural jobs alongside a decline in urban jobs, or worse still a decline in agricultural jobs without a corresponding increase in non-agricultural jobs. The Labour Force Participation Rate (LFPR), especially among women, has also been sliding. The number of salaried jobs and entrepreneurs have also been falling. These employment trends would raise serious questions regarding the potential of growth to be broad-based and affecting all sections of Indians.
The government would need to pay more attention to creating entrepreneurs and dynamic enterprises that can create more jobs for India, even as the ease of doing business is improved for all enterprises. There is enough evidence to show that MSMEs may remain small and refuse to scale up due to lack of well-thought-out policies, which incentivises smallness. Government policies to support such enterprises may be linked to creating jobs or contributing to foreign exchange revenue.
Paying attention to MSMEs and entrepreneurs, even as the government tackles the disruptions to education and health brought about by the pandemic, would hold the key to tackling problems of growth, employment and stability for India in the new year.
(Views are personal)