PM Modi 2.0 budget: Great expectations

The need is to increase purchasing power of common man if the government wants to make India once again the ‘fastest growing large economy’ by plumbing for 7 per cent to 8 per cent growth rate

The big picture about the Indian economy is a sudden slowdown in economic growth, which hit a five-year low of 6.8 per cent last year. It is also a widely accepted fact that the key reason for the slump, with its risk of spilling over to the current year as forecast by multilateral agencies and the Reserve Bank of India, is the fading consumption story, fast losing its plot, thanks to a rapidly shrinking private final consumption (spending by people in plain English).

It is also a truism that even an accelerated government spending in no way could make up for the collapse in the spending power of the people – the real driver behind the India Growth story. Therefore, there is an express need to increase the purchasing power of the common man if the government wants to walk the talk of making India once again a ‘fastest growing large economy’ by plumbing for a decent 7 per cent to 8 per cent growth rate.

It is against this big picture that Finance Minister Nirmala Sitharaman will have to present her maiden Budget on July 5. The nation will be waiting for deliverables in her speech and their macro and micro-foundations, which may turn the wheels of deliverance for the economy.

Coming at a time when the economy started pining away with slump in growth to a five-year low and the Prime Minister, on the other hand, pitching for a $5 trillion economy by 2024, the second lady finance minister of the country may find herself between a rock and a hard place since fiscal math gives her little space for rooting for the first best (worst?) solution of accelerated public spending which risks straying too far away from the deficit glide path.

Other things remaining same, she could still pull off a coup of a sort by designing schemes that may breathe new life into the now dormant but still dominant consumption theme. She may have to take express steps to create jobs – and hence income - for the common man, who has no inhibition in spending his money for buying goods and services that are necessary to keep up with ever-rising living standards than stashing away the extra cash in low interest bank accounts or fancy investment schem-es with assured risks but uncertain returns.

In economists’ words this will land the economy in a consumption-led growth episode, which means creating more jobs leading to more income that will be put to good use by buying more goods and services (increased demand), thus turning the investment cycle up (elevated public investments leading to an uptick in private investments). To make this happen, the FM may have to turn a new leaf in the mechanics and management of the economy by opting for unconventional weapons that may rightfully justify the means in the end.

Going by the public posturing of policymakers, the dominant view is to take the oft-beaten track of investment-led growth with the government playing the lead role in financing core sector projects by expanding public spending with the private sector in tow.  Arguably, this may lead to a durable solution in fixing the job crisis by creating more opportunities for non-farm employment in rural India, given the shift in labour force away from farm-related jobs.

However, it may take its own sweet time in supporting growth since such projects with massive capital outlay have to go through the maze of bureaucratic approvals. There is also a fair chance of middlemen and mandarins skimming schem-es at the cost of ordinary workers if the experience is anything to go by.

Hence the FM may take a less travelled path of a consumption-led growth by finding ways to increase the purchasing power of ordinary people so that their spending will turn the wheels of the economy and lift the overall demand.

A look at the structural shift in the economy during the past so many years supports such a view. The average share of consumption in the overall value of the economy (GDP) has been trending at an average of 70 per cent when the economy was expanding at its fastest. At the same time, the share of investment in GDP contracted to the sub-30 per cent level (29.8 per cent). Further, despite rapid growth, the tide has apparently failed to lift all the boats as the country is still stuck in a low-income trap with the lowest reading for per capita income in US dollar terms compared to comparable economies such as Brazil, Russia, China and South Africa. And low income indeed comes in the way of increased spending by people.

It is equally important for the minister to work around ways to step up the share of wages in the economy, which now remains at an abysmally low level of 33.2 per cent. The share of wages in household incomes gives a reading of 19.6 per cent while for the public sector it is as high as 68 per cent. And for private corporations, it reads a low of 31.2 per cent.  This gives enough and more reasons for her to roll out policies and schemes that not only create jobs but ensure higher wages for ordinary workers – not for the creamy layer of public sector employees – who spend most of their income on consuming goods and services.

Shrinking jobs and the declining share of wages in the national income have taken a toll on the consumer confidence with the latest survey by RBI confirming the worst fears of waning confidence of people about the future of the economy in general and their jobs and income in particular.

RBI survey shows that the Consumer Confidence Index has dived to 97.3 in May from 104.6 in March this year. The other key takeaways from the study show that households have a dim view on their economic future with all key indicators relating to the economic situation, employment, the price level and spending are either turning negative or slipping several notches between March and May.

Given these facts, she may be facing the Hobson’s choice of turning to elevated public spending to reboot economic growth. How she is going to raise resources at a time of fiscal stress, however, has to be seen. Raising taxes to increase revenue will prove counterproductive since that will lead to taxing times for the salaried class hitting their expenditure.  

However, the FM could take a lesson or two from the European nations, which resorted to unorthodox economic policies to arrest and beat a looming slump in economic growth with the active support of European Central Bank. ECB threw its full weight behind European nations in their not so conventional ways to step up consumer spending and support growth by going for the unlimited purchase of government securities. This has undoubtedly helped these nations to step up their spending in income accretive schemes without building price pressures in the economy.

If only the finance minister could nudge RBI, which incidentally has turned dovish in sync with other central banks of the world, to take this less travelled path, then the government will not have to worry about any cash crunch to finance income-generating programmes. Such policies may sound unorthodox, but since these are no ordinary times and not-so-common diseases, they need unconventional treatments.