HOW TO FIX IT

Arun Jaitley’s budget must support those worst hit by demonetisation: small businesses and the poor

Quartz india
Quartz india

How to mitigate and reverse the adverse impact of demonetisation ought to be at the top of finance minister Arun Jaitley’s agenda for the coming budget.

The effects of the ill-considered and even more poorly implemented scheme are still being felt across the country in the form of reduced economic activity, job losses, and reductions in income and consumption. Since re-monetisation is still incomplete—and, in a coercive push towards digitisation, the government has already threatened not to replace the full value of the demonetised currency—the impact from that one source alone will continue to be adverse. The immediate negative multiplier effects will generate dynamic tendencies towards reduced economic activity and employment over time, which the government surely cannot afford to ignore.

So what exactly could Jaitley do about it? Obviously, some fiscal stimulus is both necessary and desirable, since something must be done to counter the contractionary forces unleashed by demonetisation. What form could such fiscal expansion take? The most straightforward and sensible way of doing this would be to direct fiscal resources to activities that have seen the greatest decline and to those people who have been hardest hit: in other words, to informal economic activities and the poor in general.

Focus on social spending

This should involve a significant increase in social spending, first of all in the health, education, and employment schemes that have already taken such a hit over the first three years of this government.

Very significant increases should be made in the allocation for the Integrated Child Development Scheme (ICDS) which caters to pregnant and lactating mothers and infants, as also in the remuneration for anganwadi workers and helpers, which currently remains below the minimum wage requirement.

Moreover, much more money is needed for the National Health Mission and for public clinics and hospitals to enable these to come even slightly closer to the grandiose promise of universal healthcare promised by the BJP in its 2014 election manifesto. Increasing outlays for education at all levels will ensure good quality school education and expansion of public higher education at tertiary level. All these forms of spending have the added benefit of having strong positive multiplier effects, and, therefore, lead to significant increases in economic activity beyond the initial amount spent. Replacing food provisioning with cash transfers could well undermine the nutritional security of women and girls. 

There has been much talk about the possibility of the government implementing a universal basic income (UBI). If it is serious about this—and, most importantly, does not see UBI as a substitute for other necessary public provisions of food and essential social services—then obviously this should be welcomed. However, the fear is that the government won’t provide universal access, and will offer small amounts that are effectively meaningless, besides curbing other essential provisions at the same time.

This is not acceptable.

In India, food-provision, in particular, remains absolutely essential, and there are strong gender dimensions to such provisions which would mean that replacing them with cash transfers could well undermine the nutritional security of women and girls.

Universal pension

Instead of UBI, which is unlikely to be realised for now, how about starting with providing a universal pension, at half the minimum wage—something that the Pension Parishad has been demanding for years?

At present, the government continues to provide the pitiful sum of Rs200 (approximately $3) per month to people below the poverty line, refusing even to raise it to Rs500 as the UPA government had promised to do three years ago.

A universal pension (which would exclude those who receive pensions from other sources) at half the minimum wage would have many benefits: it would ensure some income to those who are unable to work, and recognise the unpaid labour of women (and some men) who have engaged in the crucial tasks of social reproduction all their lives. It would also provide some income security to poor households in general; and it would provide some dignity to the elderly, currently ill-served by both society and public policy.

Moreover, once again, it would provide demand for the goods and services of the informal sector which has been so badly hit by demonetisation.

Where’s the money, you ask?

It is interesting that proposals such as this immediately generate the response: where is the money? Ironically, the people asking this question are the same as those who demand tax concessions for corporations and the salaried classes. Indeed, the demand for tax breaks has become particularly vociferous in the wake of demonetisation, even though the brunt of the impact has been felt by the poor.

The argument is that this is what is required to lift the economy back on to its previous growth trajectory. The large, medium, and small companies now facing inadequate demand need sops to tide them over this difficult patch. Likewise, potential investors, scared off new projects by the apparent capriciousness of economic policy-making in India, need reassurance. This would also suggest that the government needs—at least superficially—to stick to fiscal deficit targets in the “approved” range.

Add to this mix the fact that the government chose to advance the budget presentation by a full month, well before it has got reliable estimates of either GDP or revenue receipts in the current year. So, more than in most years, this will be a budgetary stab in the dark. But then there is also no doubt that the finance minister knows that his provisions can have some impact on the coming assembly elections in six states, which points to the urgency of some spending measures that at least appear to benefit the poor.

All this makes the task of presenting this year’s budget somewhat more difficult than usual. The chances are that Jaitley will take the easy way out: inflate expectations of revenues both in this year and the coming year, so as to allow for greater expenditure. He may also show some spending directed at the poor, but probably not enough to make much of a difference, while also providing tax sops to business.

Given the massive economic dislocation and distress created by this government, people have a right to expect much more.

We welcome your comments at ideas.india@qz.com.

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