Privatise MGNREGS to revive aggregate demand

OVERCOMING SLUMP Resources must be employed in an intelligent manner to boost economy

NEWDELHI: The impact of the ongoing lockdown is evident in the manufacturing Purchasing Managers’ Index number for April that came out on Monday (a contraction after 32 months of expansion; and the lowest since the index began, 27.4).

Data on GST collections aren’t out — businesses have been given time till May 5 to pay their GST — but CNBC TV18 reported that Goods and Services Tax (GST) collections for the month of March, recorded in April are likely to have fallen to less than ~30,000 crore. In normal times, these figures have been around ~90,000-1,00,000 crore. This means that economic activity has reduced to less than a third of its normal levels.

Bringing the economy back on track is going to take a concerted policy effort and will require shedding entrenched orthodoxy such insisting on fiscal prudence. At the same time, resources will have to be employed in an intelligent manner. Five factors need to be kept in mind while devising such a strategy. One, unlike disruptions such as war or natural disasters, there has not been any physical destruction of capacity in this crisis. This rules out a reconstruction led path to exit the crisis. Such a strategy was key to overcoming the Great Depression in Europe after the Second World War.

Two, large parts of private sector have accumulated heavy losses due to loss of business activity. They will continue to face bearish prospects. This is because a sharp drop in economic activity has adversely affected mass demand. Any short-term aid without a sustained revival in mass demand is likely to fail.

Three, even if the government were to shed fiscal conservatism, money will be tight because of loss in revenue due to fall in economic activity levels.

Four, the lockdown has triggered a huge reverse migration to India’s villages. Even if the lockdown is lifted, the workers are not likely to come back anytime soon, thanks to the trauma and uncertainty they have faced in the past forty days. This means they will continue to suffer a loss in incomes, which will translate into weak demand .

Five, even before the pandemic hit, the Indian economy was not in a very good shape. Economic sentiment, as captured in the RBI’s Consumer Confidence Surveys, had plummeted to an alltime low. (See Chart 1)

So, how should we go about reviving aggregate demand? Export markets are unlikely to help in the short to medium term. Everybody has been hit. And there is no ruling out another outbreak of the virus, which will only make matters worse. Any recovery strategy must be inward looking. Here’s one way in which it can be done.

Food accounts for almost 40% of the average Indian household’s consumption basket. This is pretty high by international standards. Data from the United States Department of Agriculture shows that share of food consumed at home had a share of 29.1% in consumer expenditure in India. In a list of 104 countries, India was ranked 34th on this aspect. (See Chart 2)

The centrality of food spending in household budgets has emerged a major fault line in economic policy making in India. Efforts to keep food prices low to protect the poor have put a squeeze on farm incomes. Spikes in food prices, on the other hand, especially in an environment of tepid income growth, hurt nonfood demand. The crisis provides an opportunity to resolve this. Because villages will have a glut of labour supply due to reverse migration, rural wages are bound to go down sharply. Hired labour is an important cost component of agricultural production in India. For a crop such as paddy, it accounts for as much as 25% of the A2+FL cost measure, which takes into account the following: value of agricultural inputs such as seeds and fertilizers; hired human, animal and machine labour; land revenue and irrigation charges; depreciation of farm implements and buildings; interest on working capital; rent paid for leased in land; and imputed value of family labour. The current government has been using the A2+FL measure to justify its Minimum Support Prices (MSP) providing a return of 50% over the cost of production. This is as high as 30% in the case of important vegetables such as potatoes and onions. While the share is low for a crop like wheat, labour saving techniques have imposed their own costs such as pollution due to stubble burning in northern states. (See Chart 3)

What if government decided to allow employment of MGNREGS workers in private agricultural activity? This will lead to a significant reduction in cost of cultivation by easing or even eradicating the cost of hired labour. A suitable mechanism can be worked out to ensure farmers who avail this arrangement pass on their savings in terms of lower prices in both public procurement and private markets. Once logistics have been worked out, there will be multiple benefits for such a policy. MGNREGS will see a significant enhancement in employment capacity.

The government could gain from this arrangement by saving in terms of procurement expenditure. The most important benefits of this will be outside the agriculture sector though. A possible reduction in food prices will free large parts of household budgets for buying things from the nonfood economy. Even if nominal wages fall as firms try and compensate for losses and tepid economic activity, low food prices without hurting farm incomes can be an effective way of boosting real incomes of the masses in India. India spent ~71,000 crore on MGNREGS in 2019-2020. Even a doubling will mean it spends just around ~142,000 crore.