Terms of Trade | The budget is over, let us talk about broader economic policy
Economic Survey was categorical in admitting that India will not enjoy the kind of global tailwinds available to countries such as China a couple of decades ago
Ironical as it sounds, the first budgetary exercise by the third Narendra Modi government shows half a move towards the famous Gramscian dictum of the pessimism of the intellect and optimism of the will.
It's half a move because it only seems to have embraced the pessimism of the intellect. The 2023-24 Economic Survey is a powerful exhibit of this line of thinking. It is categorical in admitting that India will not enjoy the kind of global tailwinds to growth, which were available to countries such as China a couple of decades ago. A sustained double-digit growth rate – this is what saw the meteoric rise of China’s economic power – might not be in the realm of the possible is the unsaid implication.
The survey cautioned against what could potentially be destabilising exuberance in the financial markets, unlike the hubris around rallying stock markets by the ruling party’s top leadership. It also throws a reality check on whether India can really exploit the China+1 opportunity in global value chains without allowing Chinese investment in India, which poses serious national security challenges. These are all challenges to which there are no easy solutions.
The Economic Survey, to be sure, is a purely intellectual exercise. It is the Budget which is supposed to translate economic thoughts into action. How has it done on the other half of the Gramscian dictum, namely, optimism of the will?
To be fair, it is difficult for a government to show optimism after losing political capital in an election. A more appropriate task for it would be course correction. How does the budget do on this front?
The biggest sign of a course correction in the budget’s thinking is an acknowledgement of the fact that there is an employment problem in the Indian economy. This is a very different tune from the narrative the government and the ruling party have been peddling on improving headline employment numbers and entrepreneurship being the solution to the jobs problem in the recent and not-so-recent past. Will the government’s approach to the jobs problem work?
The intuitive answer is that it is unlikely. Nudges – this is what most of the measures announced in the budget are – are more likely to fix behavioural issues than hard macroeconomic constraints. There is good reason to believe the jobs problem is more in the realm of the latter than the former. The biggest proof of this is the stuttering private investment engine and historically low levels of core inflation. If companies are not willing to undertake investment and markets are not overheated, it is a clear reflection of a demand constrained economy. It is difficult to understand why they would want to hire a lot of new workers.
What is the best way to solve this problem? The most obvious answer, namely, the government spending more, is not necessarily the correct one. The government has been running a high fiscal deficit between the pandemic and now and this has clearly not done much to solve the employment or demand problem. Solving the problem requires a deeper engagement with the Indian economy.
Here are some key questions which need to be asked.
Agriculture
The employment-income imbalance in agriculture is the biggest unfinished structural transformation question facing the Indian economy. What has the government done to solve this imbalance over the last ten years?
The government’s first big intervention in agriculture was the introduction of direct income transfer via the PM-Kisan scheme before the 2019 elections. It was supposed to be a politically beneficial palliative and has been left like that. There is very little in terms of a structural impact which the scheme would have achieved. There has been a lot of talk about other things such as self-sufficiency in pulses and oilseeds but there is no concomitant fund allocation towards these goals.
The second major policy intervention of the government was in trying to push the now-withdrawn farm laws during the pandemic. The claimed benefits of these laws were always questionable and they ended up burning political capital in the wrong place which has made the challenge of pushing critical sustainability reforms in states such as Punjab even more difficult.
Would it not have been a better idea to spend the PM-Kisan money – it is about 30% of the total food subsidy spending – on something like expanding the procurement-based PDS system to include crops such as pulses which would have helped the trade balance as well as food consumption bill of poor consumers in the country? Has the government made a serious effort to try and tilt the balance of distribution of surplus value in the farm-to-food plate chain in favour of farmers away from traders?
Manufacturing
There is merit in the government’s focus on trying to break ground in the manufacturing of high-tech goods such as electronics and microchips. A lot of the China+1 game is confined to these sectors. Their limited employment impact notwithstanding, they are important from a trade balance and strategic insurance point of view. It is good that things are moving in the right direction. Of course, there is a lot of scope for more to be done here. But from a purely employment perspective, there is not much to be achieved here. How many jobs would India create even if all of the world’s iPhones were to be manufactured in India?
In a lot of relatively more labour incentive consumer goods categories which are targeted at tapping into export markets of advanced economies, the limited size of India’s domestic markets – think of better-quality sneakers for example – is an in-built disincentive for expansion of manufacturing activity.
This basically means that the quest to expand manufacturing’s employment footprint in India is more a second-order problem linked to the growth of incomes at the bottom of the pyramid and therefore demand for manufacturers rather than breaking some new intellectual ground in setting up a manufacturing policy. More purchasing power for basic consumer goods will mean more demand for their domestic production and this will eventually lead to improvement in quality and value creation which will allow India to increase its foothold in export markets for these commodities.
Services
The ongoing discussion about making sure that we adapt well to challenges from technological disruptions such as the impact of AI is clearly important. Difficult as they are to achieve, they will, even in the best-case scenario, ensure that the pace of white-collar service employment stays at its current levels. That is not going to be enough.
The real solution to India’s employment challenge lies in a different area of services. India’s social services continue to be severely understaffed and underfunded in most parts of the country. Quality perhaps is an even bigger problem than quantity in most areas. Abysmal learning outcomes at the school education level and poor employability of the students from the higher education system are a testament to this problem in education. Health is not a very different story.
The net result is the worst of both worlds for the country. It is taking a toll on our human capital in the long term and inflicting a drain of wealth on the poor population which is spending beyond their means to avail these poor-quality services from the private sector. A lot of the private sector activity in these areas can be termed as parasitic in nature which is emaciating our current and future incomes and demand.
Once again this is not an easy problem to fix. Sure, the allocation for health and education continues to be much below levels which have been recommended by the government’s own policy documents. But just throwing money at it is not going to do the job. Almost every state in the country is witnessing demands for the regularisation of teachers whose qualifications and capabilities are extremely suspect.
Political considerations always encourage governments to ignore this problem and bring more and more sub-standard stock to the system. Private operators in health and education also continue to be a big source of political finance across the political spectrum at the local level.
Instead of trying to build a consensus on this critical problem, the current government has actually alienated states by trying to force centralization in these sectors. The political controversies around the National Education Policy, governors fighting with state governments over vice-chancellors and NEET are clear examples of this.
Would it not have been a better idea for the government to have paid attention to increasing allocations in these sectors and building political consensus to solve quality issues over the last ten years than spending money on one-time asset generation schemes? To be fair, spending money on one-time transfers for political purposes is not a problem confined to just the BJP in this country. Almost all political parties resort to this strategy to boost their political prospects even as critical spending on areas that matter for the future is ignored.
In lieu of a conclusion
The overall economic doctrine of the current government is not very different from other political parties. It can be summarised as follows. It would like to maintain overall macroeconomic stability, which is critical for the growth and wealth of the well-off sections of the economy and uses the revenue proceeds from this unequal growth to seek political support from the poor. What made the current government more efficient in following this strategy were two things: Its ability to exploit social fault lines and an extreme centralisation of political authority which prevented competing vested interests from bringing a lack of cohesion. This kind of economic strategy, even when coupled with strong politics, cannot solve India’s fundamental structural transformation problems. It would be wishful thinking to believe that these problems can be solved at a time when the political base has become weaker.
A reinvention of the larger economic strategy, along the lines suggested above, cannot happen without a reinvention of the contract between economics and politics in a democracy like ours. In an ideal world, politics should have been a harbinger of equality and upward mobility for the vast masses rather than a futile self-defeating quest of trying to sweeten the bitter soup of economic inequality with fiscal palliatives. Trying to change this systemic flaw is what will take a real optimism of the will.
Roshan Kishore, HT's Data and Political Economy Editor, writes a weekly column on the state of the country's economy and its political fall out, and vice-versa
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