JOIN USThe February 1 Union Budget will not only have to match expectations and serve political expediency but also grapple with a long list of issues that cannot be brushed under the carpet any longer. These include heightened rural distress which has affected rural consumption, mounting trouble in the banking sector where the promised turning of the corner has been elusive, stressed micro, small and medium enterprises (MSMEs) yet to recover from the twin shocks of demonetisation and a cumbersome GST regime, increased fear of harassment by tax authorities and, in recent weeks, soaring petroleum prices. The net result of all this is a slowing economy, job creation far below the required rate and aggregate decelerating demand. The government should not be misled by vested interests citing a seemingly 'business-as-usual' exterior, like the stock market rally and good headline unaudited sales of market listed companies. It will do well to look at the troubles in important segments like transportation, where record discounts and high levels of loan-to-value financing is pushing sales, or fast-moving consumer goods (FMCG) companies forcing the supply chain to increase inventory though consumer demand has been slow.
Problems piling up
A good indication of the tepid demand in the economy is the low capacity utilisation in sectors like cement and, more importantly, in the large employers, like textiles. The textile industry often hires large numbers of migrant labour, meaning that its impact will be felt across villages in different states. Recent reports suggest that wages in the textile sector have started to decline, indicating that factories are letting go of workers since they have little hope of recovery. Any further job losses and declining wages will invariably compound the problem of an economy not creating sufficient jobs to absorb the estimated 12-15 million people joining the labour force annually.
Non-food credit is marginally higher than in March 2017, when the economy was battling the effects of demonetisation. Credit growth this financial year is an anaemic 0.3%. Pushing credit to consumers for housing, credit cards, education loans, personal loans, etc., has helped this statistic. This marginal increase in credit to retail segment can be a double-edged sword, especially if the economy continues to decelerate, job losses pile up and wages start to decline. Normally, in a scenario of a slowing economy, counter-cyclical spending by the government would have helped but that is not going to be so easy because breaching the fiscal deficit target will not go down well with foreign investors and the government is unwilling to upset them as it could affect the fortunes of the stock markets and bond yields. In a nutshell, this Budget will be one of the most difficult budgets presented by the NDA government.
Focused, judicious spending
Government must spend scarce resources judiciously and in a focussed manner so that the purpose of demand revival is served. The cause of stimulating the economy will be well served if the government invests in rural areas in a focussed manner. Increasing the headline agricultural credit figure is not the best way forward. The issue is not credit availability per se; the problem is, who is able to access this credit and where it is deployed. By its nature, a part of the credit is usually diverted for consumption and that cannot be controlled. The emphasis on education and demographic changes means that tenancy has increasingly gained centre stage in rural areas. Hence, offering formal sector, low-cost credit to tenant farmer groups through a separate government sponsored programme akin to the self-help group (SHG) movement will be useful.
One important programme where the government should spend money is to create infrastructure that will remove information asymmetry, more efficient extension services, invest in better water management strategies, including investing in micro and minor irrigation projects, rather than wasting money on solutions like soil health cards, whose benefits are overstated and depend on forced compliance, which ends up increasing expenditure for the farmers. Price support mechanism through purchases during plenty could be a good starting point.
The government must give priority to improving the economic health of the MSMEs. There were an estimated 6.34 crore unincorporated businesses in 2015-16 employing over 11 crore unregistered workers, and another 1.5 crore registered MSMEs employing about five crore people. At 2004-05 prices, they contributed about 37% to the GDP. Out of these, 51.3% are in rural areas while the remaining are in urban areas. Rural enterprises employ about 4.98 crore people, of which about 75% are employed by five sectors – food products, tobacco, textiles, apparel, wood and wood products. The government should seriously consider offering support to registered MSMEs and unincorporated enterprises. There is a need for budgetary support in the form of cheaper credit, technology adoption, skills, reduced compliance costs, better market access, help capacity expansion and value addition. Unlike the larger enterprises, which are concentrated in a few geographic areas, these are spread out across the country and are labour intensive. Therefore, instead of showering benefits on the large enterprises, which are technology and capital intensive, it is better for the government to spend money on MSMEs as this would work as an immediate stimulus to millions of people and help restart the consumption cycle, apart from creating jobs.
(The writer is an independent researcher based in Andhra Pradesh)