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Gist of ECONOMY SURVEY 2022-2023
Summary and Analysis of Union Budget 2023-2024

The need to Boost Labour Income and Consumption Expenditure

  • Category
    Economy
  • Published
    16th Feb, 2022

Context

The Union Budget 2022-23 has projected a fiscal deficit of 6.4% of nominal GDP, a narrowing from the 6.9% assumed in the revised estimates for the current fiscal year ending on 31st March 2022.

  • According to Finance Minister, India is on the path of fiscal consolidation to reach a fiscal deficit level below 4.5% by 2025-26 and has recognised the need to nurture growth through public investments. But the present economic context seems to forbid the same at the ground level.

Analysis

Importance of Fiscal Consolidation:

  • It is a referred to ways of narrowing the Fiscal deficit in an economy. A fiscal deficit is an amount that any government spends beyond its income and is measured as a percentage of the GDP.
  • The government resort to borrowings to bridge the deficit and has to allocate a part of its earnings to service the debt. The interest burden increases, as the debt increases.
  • In the Budget for FY22, of the total government expenditure of over ?34.83 lakh crore, more than 8.09 lakh crore (around 20 per cent) went towards interest payment.
  • Debt is one liability that is difficult to defer and, at the end of the day, the government struggles to find more resources not just for capital expenditure but also revenue expenditure. Inevitably, in the long run, an uncontrolled fiscal deficit can hit the economic growth in a hard way.

Seeds of Fiscal Consolidation:

  • In the budget speech for the Fiscal year 1995, then Finance Minister Manmohan Singh highlighted the need for fiscal discipline and pronounced a policy to end monetising the deficit.
  • Earlier the government used to finance its deficit by creating money, through issuing ad hoc treasury bills. It weakened the Reserve Bank’s ability to frame an effective monetary policy. Manmohan Singh announced phasing out ad hoc treasury bills, after which the government would fund its deficit through market borrowings.
  • Gradually as the open market borrowings piled up to fund the deficit, in the budget speech for the Fiscal year 2001, then finance minister Yashwant Sinha called for string institutional framework to ensure fiscal responsibility, resulting in ‘Fiscal Responsibility and Budget Management (FRBM) Act, 2003 which mandated limiting the deficit to 3 per cent of GDP.
  • Unfortunately, that never happened. A fiscal deficit of 3 per cent now appears to be a distant possibility. To ensure it was within the law, the government periodically amended the FRBM Act to reset the fiscal deficit target.

Trade-off between fiscal consolidation and growth:

  • Many economists have said that faster economic growth depends on limiting the fiscal deficit and that is because of the following two reasons:
    1. A high fiscal deficit will increase borrowing and the interest burden would curtail the government ability to spend productively.
    2. Increased government borrowing will crowd out the private sector in the debt market, leading to higher interest rates, which will hurt growth.

A rather balanced approach suggests that fiscal consolidation is an expenditure switching mechanism, as shifting the expenditure from revenue to capital lays the foundation for higher growth.

Economic context for this year’s Budget:

  • Reduction in Labour Income and Consumption Expenditure:
  • Sharper reduction in labour income as compared to corporate profits.
  • Sharp fall in consumption-GDP ratio as well as an absolute value of consumption expenditure during the pandemic.
  • Structural Challenges:
  • Need for the policies that can boost labour income and consumption expenditure.
  • Addressing the structural constraints of the Indian economy that restricted growth even during the pre-pandemic period.

How has the Budget fared in this backdrop?

The budget falls short of addressing the above-mentioned challenges. There are three distinct features of the fiscal consolidation process that India is observing:

  • Expenditure Compression:
  • While the share of revenue and non-debt receipts in GDP has remained more or less unchanged, the budget has sought to achieve fiscal consolidation by reducing the allocation for revenue expenditure-GDP ratio (Fig-1).

(Fig-1)

  • As a result, the brunt of this ‘expenditure compression’ fell on revenue expenditure. Although during the last two years, since the pandemic the allocation of capital expenditure as a share of GDP has been increased, but the spending on revenue expenditure has taken a hit, thereby affecting the livelihood of labour.
  • Reduction in Allocation for Revenue Expenditure:
  • As the bulk of revenue expenditure comprises food subsidies and meeting expenses in social and economic services, a reduction expenditure has adversely affected the income and livelihood of labour. The total subsidy bill has been cut by a humongous 27 per cent (Fig-2).

(Fig-2)

  • For example, the allocation for both agriculture and allied activities and rural development registered a sharp decline.
  • On similar lines, the total nominal expenditure on medical and public health registered a sharp fall in 2022-23 as compared to 2021-22. Such a reduction in expenditure has been associated with the overall fall in the allocation for total social sector expenditure (Fig-3).

(Fig-3)

Revenue Expenditure: Revenue Expenditure is that part of government expenditure that does not result in the creation of assets. Payment of salaries, wages, pensions, subsidies and interest fall in this category as revenue expenditure examples. Also, note that revenue expenses are incurred by the government for its operational needs.

  • Low Corporate Tax-GDP ratio:
  • Despite the objective of fiscal consolidation, the corporate tax ratio continues to remain below the 2018-19 level due to tax concessions. The sharp increase in corporate profits during the pandemic has not translated into an increase in the corporate tax-GDP ratio.
  • The corporate tax-GDP ratio registered a decline particularly since 2018-19 when corporate tax-ratio declined sharply from 3.5% to 2.7% (Fig-4).

(Fig-4)

Implications of reduced development expenditure:

  • The objective of fiscal consolidation along with the inability to increase revenue receipts has posed a constraint on development expenditure.
  • With non-development expenditure comprising of interest payments, administrative expenditure and various other components which are typically rigid downward, the brunt of expenditure compression has fallen on development expenditure.

Developmental expenditure refers to the expenditure of the government which helps in economic development by increasing production and real income of the country. The brunt of expenditure reduction can be felt on development expenditure and it is worrisome.

  • The reduction in the allocation for development expenditure ratio for 2022-23 reflects a reduction in the allocation for social and economic services like food subsidies, national rural employment guarantee program, expenditure in agriculture, rural development and social sector.
  • The decade of 2010s is characterised by a decline in developmental expenditure, but for a brief period, the fiscal stimulus was introduced after the advent of the pandemic in 2019-20. But the overall picture suggests that the strategy of fiscal consolidation has resulted in a decline in development expenditure in the last decade, highlighting a major constraint (Fig 5).

(Fig-5)

Concern from Macro-economic Perspective:

  • Possibility of actual expenditure falling short of Budget Estimates:
  • The Budget estimates of different expenditures are sensitive to the growth estimates for 2022-23. The actual GDP growth rate in at least the last four years have been consistently lower than what was initially projected by the Economics Survey, so the possibility of actual expenditure falling short of budget numbers cannot be assumed away. If the GDP growth rate and revenue growth rate happens to be lower than what is projected, then the actual expenditure can turn out to be even lower than what is projected and if so happen it can further deteriorate the situation.
  • Even if the actual expenditure is close to the budget estimates, the recovery of labour income and consumption expenditure would be largely restricted by how fiscal consolidation has been carried out. This is because the reduction in the allocation for development expenditure would hurt labour income and consumption expenditure.
  • The positive impact of higher capital expenditure on the recovery process would be largely curtailed by the adverse impact of more than proportionate fall in revenue expenditure.
  • Dependent on External Factor for Economic Revival:
  • In the backdrop of fiscal consolidation strategy, the prospect and extent of economic revival in the present scenario appear to be depending heavily upon external demand.
  • Despite the recovery in exports, the possibility of sustained economic recovery relying exclusively on exports appears bleak at the present as different countries have also started pursuing the strategy of fiscal consolidation at the dictate of the IMF.

Boosting wages and raising consumption:

  • India, which is a young nation with a median age of 28.43 years, poses a great demographic advantage. But at the same time, unemployment poses the gravest economic challenge to India. Massive expansion in government spending is needed, which will uplift workers’ skills as well as their incomes and purchasing power.

The current unemployment rates are Urban: 8 per cent, Rural: 6 per cent. In the last two years, 84 per cent of households have suffered a loss of income. As against the 12 lakh new jobs a year, the number of persons who enter the workforce every year is 47.5 lakh (source: Labour Bureau). In the workforce, the LFPR (Labour Force Participation Rate) is the proportion of the population that is presently employed or seeking employment. In India, the current numbers are workforce: 94 crores, LFPR: 37.5 per cent, equal to 52 crores (source: Economic Survey, Appendix).

  • Incentives must be given to the sectors where jobs can be created.
  • We are a consumption-driven economy and the following measures may be considered to boost consumption expenditure:
  • Increasing the disposable income
  • Rationalising taxes
  • Measures to create livelihoods, especially in rural areas
  • Reviving the hard-hit sectors like the MSMEs
  • Incentivising the farming community to shift from grain-based farming to cash crops, horticulture and livestock products.
  • Shifting labour force from agriculture to manufacturing. That is possible if labour-intensive manufacturing takes place in a big way, creating employment opportunities for the labour force with low or little skills, generating income and demand. We also have to go for large-scale vocational training from the secondary-school level.
  • “Labour reforms” for guaranteeing minimum wages to be paid.
  • For equitable growth, India must maximise labour’s share in national income. The labour share of income- the share of national income paid in wages, including benefits, to workers needs to be increased.
  • Improving the corporate tax-GDP ratio can help the government to register an increase in its revenue and by doing so it can allocate funds to revitalise social security schemes targeted at income generation for lower-income groups.

Conclusion:

In a consumption-driven economy like India, the income must reach the lower-income group that can spur the demand of goods resulting in increased consumption expenditure. Jobs generation is critical to a country like us, given the size of its young population. Jobs generate income and income results in more consumption. As the consumption increases, the demand for goods and services also increases and the manufacturers have to produce more to meet the demand, which means even more jobs gets created, exemplifying the multiplier effect.

Low labour income negatively affects macroeconomic aggregates like household consumption and savings, investments, output and demand, all of which are important ingredients for growth. In addition, low labour share makes it impossible for the workers to accumulate wealth, invest in education, skill training, housing or health. The key to the faster economic progress of India lies in income growth. At the moment Indian economy needs an effective policy that can not only give impetus to aggregate demand but also give a boost to labour income.

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