In India, a diminished economic future

Recently published data on key indicators of the Indian economy are a sobering reminder of the diminishing economic future that most Indians confront and the stubborn refusal, indeed abdication, by our policymakers, to craft an appropriate policy response.

In late July, the government released estimates from the third annual round of the Periodic Labour Force Survey (PLFS), conducted between July 2019 and June 2020. 

One of the starkest revelations from the survey is that India witnessed an unprecedented, sharp increase in the share of workers employed in agriculture from 42.5% in 2018-19 to 45.6% in 2019-20. 

In a sharp reversal of structural economic trends, agriculture was the biggest employer responsible for creating 32.72 million jobs.

This was accompanied by a fall in the share of manufacturing, construction, transport and 'other services' in total employment.

That this shift to agriculture is a sign of deep distress and employment of last resort is evident in Santosh Mehrotra's analysis of poverty incidence using PLFS data. Mehrotra's calculations reveal that between 2011-12 and 2019-20, the absolute number of poor increased by 70 million.

It is important to note that PLFS data only captures the first three months (April-June) of the pandemic-induced economic shock. 

As Mahesh Vyas points out, Centre for Monitoring Indian Economy (CMIE) data shows that this 'reverse migration' to agriculture has, in fact, deepened through 2020-21 (July-June). 

In the first wave, the worst impact of 'reverse migration' was partially mitigated by the relative resilience of agriculture, which grew by 3.6%, the only sector of the economy to do so. 

In addition, welfare spending in rural India through the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), in particular, was ramped up and provided some minimal succour.

But these conditions do not prevail today, in the aftermath of the deadly second wave.

First, the monsoon conditions have not been as favourable. Second, and more importantly, government welfare spending has been stubbornly low.

Central government spending in key sectors such as rural development (MGNREGS) in the first quarter (April-June) of 2021 is far lower than last year, leaving the rural workforce vulnerable. 

In June 2021, for instance, MGNREGS provided nearly 10 million fewer jobs than in June 2020, meeting approximately 83% of the demand for jobs compared with 87% in the previous year. 

The refusal to ramp up spending, despite the deadly second wave, has likely left households in deeper economic distress. 

Agricultural wages may not remain resilient as they did in 2020, making the need for more government spending in rural India urgent.

Perhaps policymakers have chosen to ignore these vulnerabilities because the formal sector of the economy is showing signs of recovery, in turn, filling the central government's coffers. 

The Centre's revenue receipts and fiscal deficit numbers for the first quarter of this year are looking better than 2019. 

Overall, it collected 27% of its budgeted receipts in June 2021 compared with 14% in 2019. Of course, part of this is due to the bonanza from excise collections on petrol and diesel.

Significantly, corporate tax collections were a healthy ₹1.23 lakh crore. Healthy corporate taxes underscore the reality that like last year, economic recovery, such as it is, is profit-led. 

And while this may offer some short-term comfort to those tracking Gross Domestic Product (GDP) numbers, not only does this expose the bulk of the economy to prolonged vulnerability, this will only deepen the structural crisis highlighted by PLFS.

As HSBC's Pranjul Bhandari has repeatedly pointed out, gains to the formal sector post the pandemic have come at the cost of putting small, informal firms out of business. 

And while this 'forced formalisation' has kept profitability high, it has left the bulk of India's households, which find employment in the informal sector, financially vulnerable.

That households are vulnerable is also reflected in the Reserve Bank of India (RBI)'s consumer confidence surveys and points to the deepening demand crisis. 

The latest survey for July 2021 showed persistent weakness in consumer confidence as most households reported lower incomes than a year ago. 

If unchecked, the likelihood of the 'reverse migration' trend becoming an endemic feature of the economy is real.

In the short-run, the policy prescriptions are well known and have been widely discussed in the public domain. 

A consumption boost through food, work (MGNREGS), and cash transfers in urban India remain essential for relief today than in the peak lockdown last year. 

The government's continued refusal to provide a robust stimulus, beyond an expanded public distribution system, despite some fiscal elbow room with relatively healthy revenue receipts and a fiscal deficit under control, is inexcusable, even callous.

However, the long-term challenge for India remains finding its way toward an employment-intensive growth trajectory. 

This will require more than the current policy toolkit of extended credit guarantees and bulldosing reforms, as was attempted through farm laws. Perhaps it is worth acknowledging that there are no clear pathways. 

From factor market reforms, to understanding and responding to the unique supply constraints, including difficulties that confront the female labour force, to overcoming barriers to scale experienced by small and medium enterprises, each of these challenges requires careful deliberation and coordinated policy action between sectors of the economy and between the Centre and state governments.

Employment-intensive growth needs State investment in human capital, in markets and in enabling regulation. 

But first, and above all, the government needs to acknowledge the deep structural crisis that it is staring at.

Yamini Aiyar is president and chief executive of the Centre for Policy Research

Disclaimer: This article first appeared on Hindustan Times, and is published by special syndication arrangement.