On February 1, the BJP-led government will place its Interim Budget in Parliament, seeking a vote on account. Has the NDA government’s economic performance in its second term fared better than its first? D.K. Srivastava and G. Vijay discuss the question in a conversation moderated by Kunal Shankar. Edited excerpts:
In retrospect, how do you view the government’s policy prescriptions in 2019?
D.K. Srivastava: In the interim Budget of 2019, the Indian economy was not that well placed. Just before 2019, two major reforms had been introduced. The first was the Goods and Services Tax (GST), which had certain implementation problems. Corporate income tax reforms had been introduced, which led to an erosion of the Central government’s tax revenues. So, we started 2019 with a weak fiscal situation. The situation was still somewhat subdued when we entered the COVID-19 phase in 2021. We were not prepared; we did not have economic or fiscal strength. This is why we experienced a sharp contraction.
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Since then, we have recovered very fast in terms of GDP growth. In FY22, because of the base effect, we clocked in more than 8.7% and in FY23, 7%. in FY24, from the latest estimates, the growth rate for the year is pegged at about 7.3%. So, recovery has been very good. The effect of COVID-19 was experienced in a more serious way in the contact-intensive sectors and in many large service sectors. These sectors, particularly small- and medium-scale industries, also employ vast numbers of people. Therefore, recovery was a K-shaped one. But the government focused on infrastructure expansion, which means building public assets, which would serve the economy and support growth in the medium to long term; this is a positive outcome.
We must not forget that those were the years following demonetisation. Ms. Sitharaman said on July 5, 2019 that the “government stood out as a performing government, a government whose signature was in the last mile delivery.” She said, “Between 2014 and 19, we provided a rejuvenated Centre-State dynamic, cooperative federalism, GST Council and a strident commitment to fiscal discipline.” Comparing her pre-pandemic Budget presentation with the scenario now, how do you think the economy has fared?
G. Vijay: First, with reference to the GDP numbers, one might say that the government’s performance looks good. But the question is whether or not this is sustainable. This is where I would go back to the 2016 demonetisation exercise, which contributed to a long-term contraction. GST as well as COVID-19 were additional shocks, which the unorganised sector especially received. Recovery from these is still seen with scepticism given the high rates of unemployment that we continue to see. To look at the recovery in terms of mere value versus looking at it in terms of employment and livelihoods would require different kinds of assessments. There are multiple reasons why the numbers on unemployment and inflation look unfavourable and scholars have begun describing this phenomenon on the lines of jobless growth. Therefore, I think the current situation cannot be analysed beginning with 2019; we have to go back to 2016.
Mr. Srivastava, coming to the GST Council, Kerala just announced a march in Delhi to protest against the Union government’s “neglect” of the State. In the past five years, the concern appears to be skewed revenues and centralised decision-making in Delhi.
D.K. Srivastava: There is no doubt that the GST story is incomplete and there are many aspects of GST reform that require attention. It did not turn out to be revenue neutral, although it is at a point of transition. In fact, in the Constitution amendment, the voting has been structured such that it is difficult for any State government to carry forward any of its own decisions. There has been an effective loss of revenue autonomy for the State governments. Even when many State governments get together, it will be difficult for them to either agree on a certain change in the GST structure or get it passed through the GST Council. I don’t think it can be reversed any more, but it can be reformed.
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On the issue of last-mile in your previous question, I think the government has succeeded in introducing large-scale digitisation of the transactional matrix of the Indian economy. Many small-scale industries and economic agents in the informal sector are able to participate in the digital transactions through the UPI platform.
We must recognise that we are facing massive global challenges aside from the COVID-19 shock. The supply side challenges continue to emanate from the global economy. Therefore, the government must provide capital stimulus as it is doing now. But it must do more to stimulate consumption to match investments. So, in times of this massive external sector challenge, maintaining a high level of growth is the first requirement for also ensuring jobs.
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G. Vijay: The way the GST Council has been working cannot be analysed independently of Centre-State relations, which have been problematic under the current regime. We have seen the kinds of conflicts between Chief Ministers and Governors as well as the kinds of pressures that the state is facing vi-a-vis the requirements of finance in terms of the structural distribution of responsibilities. While revenues are being controlled extensively by the Centre, with little leverage for State governments, following the implementation of the GST regime, we see a politicisation of the entire distribution of these resources. The responsibility of executing many welfare programmes lies with the State governments and they are therefore likely to face a lot of pressure if they fail. This clearly wouldn’t emerge in terms of numbers, but one has to look at other kinds of institutional relations, a variety of conflicts, and then analyse the role that the GST Council is playing.
In its last Budget, the government announced an increase of 33% in capital expenditure to ₹10 lakh crore, which it claimed was for income generation and employment growth. Has this happened?
G. Vijay: I think the problem has been with the kind of capital-intensive technologies that have been employed to carry out these infrastructure projects, they adversely affect the elasticities vis-a-vis employment generation. The unemployment rate was around 9.4% in October 2023. Although it has witnessed a marginal decline since, it still remains quite high. So, if that expenditure was indeed creating a large number of jobs, I don’t think these numbers would be so bad. So, I think with reference to the emphasis on building infrastructure, the focus has not been on employment generation. And by employment generation I also would like to point to the quality of employment. The kind of employment avenues that are getting generated through these projects are predominantly in the informal sector and these are highly unprotected and lacking bare minimum social security protections. For the past nine to 14 years, there has not been a wage revision in almost 72 notified sectors. So, you clearly see what is happening to labour.
In the backdrop of the severe supply chain shocks that we witnessed this past year due to extreme weather and spikes in wholesale and retail prices of food, how do you view the agricultural sector’s performance over the past five years?
G. Vijay: The numbers show that a substantial share of children suffer ‘wasting’. Given this, moves such as producing ethanol using rice grains or sugarcane are problematic. This is an indirect way of resorting to corporatising agriculture. But there the policy has been quite inconsistent. The government began by saying that we have a huge surplus foodgrains and then eventually due to the uncertainties of weather, there were bans on exports and sale from the Food Corporation of India and a ‘pause’ on using sugarcane to produce ethanol. Quite clearly there is a challenge. If you look at inflation and the food basket, pulses are at 20.73%; vegetables at 27.6%; food at 11.4%; sugar at 7.14%; cereals at 9.9%; and spices at 9.7%. So, with reference to assessing inflation overall, if we see the aggregate versus what matters to the average person, there is a structural crisis emerging.
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D.K. Srivastava: As far as sectoral growth figures are concerned, agriculture, except for the current year, has done very well. In fact, its average growth rate was more than 3%. Agriculture has been a saving grace in the last four years and our overall agriculture strategy, although it is largely a subject handled by the State governments, is like that of any other developed economy. But the centre of gravity of the economy has to shift away from agriculture. The future lies in moving away from agriculture to industry and services.
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D.K. Srivastava is Chief Policy Advisor at Ernst and Young, India; G. Vijay is Professor, Department of Economics, University of Hyderabad
