A plan to revive a broken economy
There are clear, implementable steps the Centre can take in fiscal terms to revive the economy and support livelihoods
- The Prime Minister has just announced Lockdown 4.0. Despite some resulting increase in economic activity, vast numbers of working people will remain without their regular incomes.
- PM also announced a package of ₹20-lakh crore, but this includes already allocated money of ₹6-lakh crore and monetary policy directives to banks and non-banking financial companies.
- The announcements by the Finance Minister thus far involve no additional public spending, even though this is urgently required to revive the economy and prevent further contraction.
- Here we discuss what the government should do immediately in fiscal terms for reviving the economy and supporting livelihoods.
Food and cash transfers first
- The immediate need is to provide free food and cash transfers to those rendered incomeless.
- Providing every household with ₹7,000 per month for a period of three months and every individual with 10 kg of free foodgrains per month for a period of six months is likely to cost around 3% of our GDP (assuming 20% voluntary dropout).
- This could be financed immediately through larger borrowing by the Centre from the Reserve Bank of India.
- The required cash and food have to be handed over to State governments to make the actual transfers, along with outstanding Goods and Services Tax compensation.
- Foodgrains are plentiful, as the Food Corporation of India had 77 million tonnes, and rabi procurement could add 40 million tonnes.
- Because of the lockdown restrictions, the multiplier rounds of such expenditure are heavily truncated at present and would not generate as much demand as in normal times.
- The cash transfers in many spheres will only enable current demand to continue (such as payment of house rent to continue occupancy) and not create any fresh demand.
- When greater normalcy finally allows pent-up demand to surface, output could also expand because of resumed economic activity.
- Finally, putting money in the hands of the poor is the best stimulus to economic revival, as it creates effective demand and in local markets.
Revamp MGNREGA work
- The revamped MGNREGS could cover wage bills of rural enterprises started by panchayats, along with those of existing rural enterprises, until they can stand on their own feet.
- This can be an alternative strategy of development, recalling the successful experience of China’s Township and Village Enterprises (TVEs).
- Public banks could provide credit to such panchayat-owned enterprises and also assume a nurturing role vis-à-vis them.
- The change is the palpable unsustainability of the earlier globalisation, which means that growth in India in the coming days will have to be sustained by the home market.
- The MGNREGS can be used for this, paying wages for land development and farm work for small and medium farmers; apart from government support through remunerative procurement prices, subsidised institutional credit, other input subsidies, and redistribution of unused land with plantations.
- Agricultural growth in turn can promote rural enterprises, both by creating a demand for their products and by providing inputs for them to process; and both these activities would generate substantial rural employment.
The urban focus
- In urban areas, it is absolutely essential to revive the Micro, Small and Medium Enterprises (MSMEs).
- Simultaneously, the vast numbers of workers who have stayed on in towns have to be provided with employment and income after our proposed cash transfers run out.
- The best way to overcome both problems would be to introduce an Urban Employment Guarantee Programme, to serve diverse groups of the urban unemployed, including the educated unemployed.
- Urban local bodies must take charge of this programme, and would need to be revamped for this purpose.
- These measures are in direct contrast to those that seek to entice private investors by easing labour laws.
- The humanitarian crisis of the lockdown reveals the imperative for more, not less labour protection.
The ‘care’ economy
- The post-pandemic period must see significant increases in public expenditure on education and health, especially primary and secondary health including for the urban and rural poor.
- Vacancies in public employment, especially in such activities, must be immediately filled.
- Anganwadi and Accredited Social Health Activists/workers who provide essential services to the population, including during this pandemic, are paid a pittance and treated with extreme unfairness.
- We must improve their status, treat them as regular government employees and give them proper remuneration and associated benefits, and greatly expand their coverage in settlements of the urban poor.
- A combination of wealth and inheritance taxation and getting multinational companies to pay the same effective rate as local companies through a system of unitary taxation will garner substantial public revenue.
- They will also reduce wealth and income inequalities which have become horrendous.
- A 2% wealth tax on the top 1% of the population, together with a 33% inheritance tax on the wealth they bequeath every year to their progeny, could finance an increase in government expenditure to the tune of 10% of GDP.