Some economic priorities for 2022
The New Year will soon be upon us. Within a month of the New Year's dawn, the finance minister will present a budget, outlining her spending priorities for the next financial year which begins in April 2022. We will also get a report card on the country's economic performance via the Economic Survey. Thanks to many frequently measured indicators which come every month or even every fortnight, we don't really have to wait for the year-end report card to know how we are doing. This year end column is not really about a pre-budget wish list, as about identifying the priorities for next year.
As we welcome the New Year, what is the economic backdrop? On the positive side, the world economy is practically booming, with two of the largest economies i.e. America and China both growing above 5 per cent. In America, the high growth is causing some overheating. The inflation rate has peaked to nearly 7 per cent – the highest in four decades. It is exacerbated by excess money supply and now, labour and skills shortage. The high growth in the world economy should be an exporting opportunity to developing countries like India. Indeed, India's goods exports may touch 400 billion dollars this year, a jump of nearly 40 per cent over last year. The other positive indicators are healthy tax collection (much ahead of the target set in last year's budget), roaring stock market and high company valuations, good profitability in the corporate sector (at least large corporates), and a low ratio of the net non-performing assets (i.e. bad loans) on bank balance sheets.
On the negative side, firstly is the anxiety about Omicron. How big will the third wave be? Will it be potent? Will it force lockdowns? This fear is partly mitigated because there is better preparedness in the healthcare sector (including oxygen and beds), a higher and increasing share of vaccinated people, there is a hybrid and higher level of herd immunity, there is better enforcement of protocols like masking, better understanding of micro-managing lockdown restrictions and finally, a weary and perhaps reluctant acceptance that life must go on. Additionally, perhaps this variant, while highly infectious, is not as potent in causing fatalities. Of course, this is not to advocate letting the guard down.
The other negatives are distress in the informal economy, especially in contact intensive sectors (like roadside vendors, kirana shops, mall workers). The rural economy is also under great stress as is manifest in the increased demand for work under the National Rural Employment Guarantee Scheme (NREGS). Despite an expected bumper crop, the prices of cereals are low, and hence the demand for a higher Minimum Support Price. Meanwhile, food inflation is rising thanks mainly due to edible oils (largely imported) and protein items like milk and poultry. Rural unemployment rates (hence high demand for NREGS) and rural wages are stagnating. The CMIE and ILO data show India's labour participation rate (LPR) is only about 40 per cent – the lowest in Asia. This is the ratio of people between 18 and 60 who either have a job or are seeking one. Even Bangladesh is at 53, Pakistan at 48 and Nepal at 74. Is India's low ratio revealing discouraged workers, who have given up hope of even finding a job? India's female labour participation rate at 20 per cent is already the lowest among peer countries and has been a cause of concern for quite some time.
Added to inflation and unemployment (and low LPR) is the phenomenon of increased inequality. The latest World Inequality Report 2022 shows that the top 10 per cent holds 57 per cent of the total national income. Of this, the top 1 per cent alone holds 22 per cent of national income, while the bottom half holds just 13 per cent. This makes India one of the most unequal large economies. It also corroborates the recent report of Niti Aayog (based on the National Family Health Survey data) of high multidimensional poverty rates in states like Bihar, Jharkhand and Uttar Pradesh. The Niti Aayog measure actually excludes income, and depends on measures like infant mortality, ownership of assets and education.
Beyond Omicron, inflation, unemployment, poverty and inequality are other worrying measures such as the slow offtake in credit from banks, little evidence of large investment projects forthcoming from the private sector, and the continued absence of students from schools. This two-year hiatus in schooling can have a long-term detrimental effect on India's human capital development.
So the priorities for next year seem selfevident. Firstly get ready for Omicron without using harsh lockdowns, or spooking or panicking the public. The vaccination progress must be sustained and accelerated. Secondly, ensure that schools are started everywhere, with at least 50 per cent rotation of students. Skilling and training, including a nationwide portable apprentice scheme with government-backed accreditation, must be rolled out with urgency. Corporations will readily employ apprentices if they are free from the burden of hiring them permanently. Thirdly, start executing the national infrastructure pipeline projects in earnest. These promise expenditure of close to 20 lakh crore annually, which can have a multiplier effect on jobs as well as ancillary and vendor industries. Fourthly, ensure support to sustained export growth. Zero rating of GST is desirable. Don't shackle agriculture exports. The Production Linked Incentive scheme which is currently applicable to 13 sectors must succeed and should also dovetail with export support. India has to learn from Bangladesh, which with sheer focus on the export of textile and clothing for more than a decade, has overtaken India in terms of per-capita income. The fifth item is to rationalise the tax burden. The indirect taxes like GST hurt the poor much more than the rich. We have regressed, since the share of direct taxes of the total has fallen. This needs to be reversed. Doing that will also make a dent on rising inequality.
Next year will hopefully see the economy on an up-cycle. Private investment is bound to pick up once business and consumer confidence picks up. For that to happen some of the above policy imperatives have to be implemented and require action, both from the central and state governments. Here is wishing all our readers a safe, healthy and prosperous 2022.