Can politics shape revival of economy after Covid?

Reverse migration is among the key economic consequences of the pandemic

India’s GDP will not reach 2019-20 levels until 2021-22 according to World Bank projections. There will be immense economic pain in the days to come. The impact will vary for different stakeholders in the economy. Both policy and politics will have an important role to play in recovery. The first part of this series, which was published on June 13, argued that states with higher non-farm, nongovernment share in the economy will suffer more. It also argued for collecting more data to come up with an informed policy response.

What about politics? The Indian economy is entering a contraction phase after a prolonged slowdown. Resources of both businesses and government were already stressed. India’s policy response will also be an exercise in distributing very scarce resources across practically unlimited demands. In a democratic set-up, politics can be used to influence policy in the interests of the majority by collective mobilization.

The agriculture sector is expected to show positive growth despite the disruption caused by the Covid-19 pandemic. This does not guarantee a rise in farm incomes. Mass incomes outside the farm sector will drop in a big way due to economic contraction. This is bound to affect purchasing power, and eventually, food demand.

India’s farmers have very little bargaining power when it comes to prices. Anecdotal accounts of crops being abandoned due to price crashes are quite common. A collapse in food prices due to poor demand cannot be ruled out. Real agricultural growth figures will not capture this development. This is because it discounts for price changes. Nominal growth statistics will have to be observed carefully. The Indian economy suffered a phase of collapse in nominal agricultural growth in the period before the 2019 general elections.

This created large scale farm distress and anger. The Bharatiya Janata Party (BJP) paid heavily for it. It lost the crucial assembly elections in Rajasthan, Madhya Pradesh and Chhattisgarh in 2018. A policy correction followed. Direct cash transfers of ₹6,000 per year were announced under the PM-KISAN scheme. (See Chart 1)

The government announced the Minimum Support Prices (MSPs) for the 2020-21 kharif season earlier this month. The MSP hike for paddy, the main kharif crop, is the lowest in 10 years. The MSP for paddy has increased 2.9% from ₹1,815 per quintal last year to ₹1,868 per quintal. The last time the hike was lower than this was in 2010-11, when the MSP was not increased at all. These are nominal price comparisons, as real MSP for 2020-21 requires inflation data for the entire year. Holding back on MSPs at a time of weaker demand is bound to generate headwinds for farm incomes. But this will save resources for the government. Whether or not this changes will depend on agrarian mobilizations.

Caste is an important political fault line in India. Economic fortunes follow caste hierarchies. Many political parties claim to represent the interests of socially backward caste groups. Reservation in government jobs is one of their key demands.

This is not surprising. Government jobs are better paying and secure. Historical discrimination has led to under-representation of the Scheduled Caste (SC), Scheduled Tribe (ST) and Other Backward Class (OBC) workers in government jobs. The Periodic Labour Force Survey (PLFS) data for 2018-19 shows this. Of the total jobs in the government, local body, and public sector enterprises sector in 2018-19, 33.2% were held by workers who were not from SC-ST or OBC communities.

Their share in the total workforce was 26.3%. This implies their share in government jobs was 1.27 times that in the Indian workforce. This relative share in government jobs was 1.03 for SC workers, 0.82 for ST workers, and 0.87 for OBC workers. In normal times, prioritizing the rhetoric around reservations is justified. It promises upward mobility in the future.

However, there is merit in recalibrating this strategy going forward.

Politics, during a recession, should be about protecting current jobs and incomes rather than eying future gains. PLFS data shows that the share of SC-ST and OBC workers in regular jobs (which offer reservations) is significantly lower than that of upper castes. It makes sense for parties representing the interests of these groups to focus more on demanding relief in sectors and areas for where their base is currently employed. Social justice rhetoric should focus more on the vulnerabilities in private sector, especially casual workers and self-employment, than reservation.

Reverse migration due to the lockdown is among the most important economic consequences of the pandemic. The 2016-17 Economic Survey, an annual publication of the ministry of finance, says that domestic remittances serve 10% of households in rural India. (See Chart 2) In remittance receiving households, they financed over 30% of consumption.

These incomes will have to be revived in order to restore growth.

Offering alternative employment opportunities in villages can at best be a palliative. Ultimately, migrant workers will have to be encouraged to return.

Politics can play a role in this. An overwhelming majority of migrant workers are not unionized at their work place. They have very little bargaining power vis-à-vis employers. Being outsiders also makes them more vulnerable to the apathy of the local administrations. However, there is reason to believe that these workers are closely linked with each other by their place of migration.

Workers returning in groups to their native places are the biggest proof of this. Political actors in their home states could use this opportunity to protect their interests. State governments could be pressured to defend the interests of migrant workers.

This could take the form of organizing better transport facilities for their return. It could include extracting guarantees of better working conditions or social security, such as a ration card upon arrival, from the governments of states where they work. (This is the second of a two-part series on the role of policy and politics in dealing with the economic challenges posed by Covid-19. The first part dealt with the need for differentiated and better informed policy)