Union Budget 2022: Rekindle Consumption By Creating More Jobs

By Dipti Deshpande

Every annual Union Budget is a creature of its context that foregrounds certain priorities.

The new year brought with it a fresh set of challenges for India. Just as the economy was picking up after the second wave, came omicron, and uncertainty in its tow. Meanwhile, monetary policy, having done most of the heavy lifting in the past two years, has started moving, albeit cautiously, towards ‘normalising’.

It’s not as simply though, for fiscal policy.

With most of the initial pandemic disruption behind us, the Budget this year could pursue a fiscal deficit correction path, but not an aggressive one, given the economy is not fully back on its feet. In other words, the Fiscal Responsibility and Budget Management fiscal deficit target of 3% of gross domestic product (GDP) pales in the face of the urgency to lift growth.

Moreover, with there appearing a greater urgency to normalise the monetary policy — domestic inflation risk and US Federal Reserve action being hot items — fiscal policy may need to take the slow route to fiscal discipline.

With that established, the key question that remains before this Budget is: should the government continue to focus only on the capital expenditure (capex)-led route to economic growth, or could it also accommodate short term consumption-supportive measures?

The past few budgets have made clear the government’s intent to drive growth by leaning on a mix of capex and reforms, expected to alter the growth trajectory over the medium to long term. But with the pandemic throwing millions out of work and their ability to spend weakening considerably, immediate measures to support incomes and private consumption are crucial and can create a much-needed bridge to the medium-term path.

To be sure, the Union Budget need not be the only occasion to do that. But it continues to hold importance as a signaling event as to where the government’s focus areas for spending during the year might lie.

Broadly, there are two areas where the government could make a difference.

Income growth through increasing allocations for job schemes

The slowdown in incomes, which started in fiscal 2018, accentuated with the pandemic. Data from the National Statistics Office shows per capita GDP grew at 6.9% in fiscal 2017 and thereon slowed on a sustained basis to 3% in fiscal 2020. It contracted sharply by 8.2% in fiscal 2021. Beyond that, the catch-up has been slow. By the end of this fiscal, it would not even have caught up with fiscal 2020 levels.

The onset of the pandemic and the consequent nationwide lockdown led to a flood of reverse migration from urban to rural areas. For fiscal 2021, the government announced a higher allocation under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and rural construction works, providing succor to workers in the hinterlands.

But that was short-lived. In the Union Budget 2021-22, these allocations were downsized as Covid cases were contained. However, data suggests that in the absence of employment opportunities in urban areas, demand for rural works stayed high even this fiscal, a large part of which remained unmet.

In fiscal 2021 about 45% more person-days were generated on-year under the scheme. In this fiscal so far (April to December), person-days generated have fallen ~6% compared with the year-ago period, while jobs demand has stayed higher than employment provided.

The MGNREGS remains the only lifeline for those at the bottom of the heap, who have borne the brunt of repeated pandemic waves, restrictions and social distancing norms, and lack of employment opportunities in urban areas.

The figures reflect how critically dependent rural folks are on these schemes, and underscores the merit in increasing spending under the MGNREGS and other rural construction works schemes such as Pradhan Mantri Awas Yojana and Pradhan Mantri Gram Sadak Yojana to support rural incomes and revive demand.

On these lines, there is also merit in introducing similar employment generation schemes in the urban areas, given how the slowdown in activity continues to keep huge swathes of workers such as in urban construction un/underemployed, even if lockdowns have become less restrictive. The case for a national urban employment guarantee scheme has repeatedly been put forth by experts as well as the Parliamentary Standing Committee on Labour in its August 2021 report.

Similarly, the pandemic has prompted a shift towards online shopping largely in urban areas, which is believed to have taken demand (and hence jobs/incomes) away from the unorganised sector, given e-commerce platforms are dominated by large, organised players.

Thus, policy support focus on incomes must continue for longer, till demand conditions show sustained improvement.

Inflation control by paring fuel duties

The sharp rise in inflation in the essential spending categories is burning a hole in spenders’ pockets. In general, rising inflation erodes purchasing power. But when inflation is high in items that are considered essential such as food, rent, clothing and health, where the spending is sticky, it can discourage overall consumption, leaving very little to be spent on discretionary items.

In India, inflation in the essentials category for the three years through this fiscal was, on average, 210 basis points higher than for the three years ended fiscal 2019. In contrast, inflation in discretionary categories was only 50 basis points higher. 

Fiscal policy can help control inflation by further bringing down excise duty on fuels. After a welcome reduction of excise duties on petrol and diesel by Rs 5 and Rs 10 per litre respectively, in November 2021, some more relief can help the consumer now. 
The question of fiscal space

Though nominal GDP growth is estimated to decline from 17.6% in fiscal 2022 to ~12% in fiscal 2023, it remains strong. Moreover, a broad-based recovery and improved compliance should benefit tax collections. Fiscally speaking, therefore, there might be some room to accommodate spending on employment generation in rural and urban areas, and to further ease the fuel tax burden of the consumer. The inflationary impact of spending could also somewhat be offset by the reduction in fuel taxes.

This does not mean a steroidal lift is advocated. Any support measures will have to be designed carefully after weighing their impact on consumer price inflation, which is already high and has remained so through the pandemic for various reasons.

The government will have to maintain a delicate balance between weak growth that necessitates policy support and high inflation that discourages fiscal largesse. The difficult choice will be where to spend such that policy effectiveness is high and also yields growth in the short term, without fueling inflation beyond what is tolerable.

Delaying sharp fiscal correction to make room for infrastructure spending and boosting employment is probably the best bet at this juncture.

Dipti Deshpande is Principal Economist at CRISIL Limited. Views are personal