Consumption and unemployment at 4-decade low, Budget 2020 is crucial for economy

The 2020 Budget is going to be a ‘make or break’ budget for the ruling BJP. The government played whatever cards it had but years of policy adventurism have left the economy in acute distress. BJP is trying to defuse the economic crisis with its divisive political agenda to distract people’s attention but this can, at best, buy them a little more time.

The economy has now reached a tipping point where any further slip could have catastrophic outcomes. Unemployment has reached painful levels, demand is declining and tax collections have reached a point where the government does not have the money to launch a credible rescue act. If things stay the way they are, the crisis could spill over to the streets sooner rather than later.

There is a fundamental flaw in the way the BJP government has been approaching the Indian economy. They believed that bottom-up growth needed to be replaced by trickle-down economics. The idea being that if the industry was given enough tax breaks, they would start investing more and create new jobs which would start a fresh cycle of growth.

The model has not quite worked. The government has gone too far down the road to turn back and even if the government was to do a course correction now, it would take a couple of years for results to show. The golden rule of economics, and perhaps life, is that while destruction is easy, building something takes time. But time for the government is running out.

In their euphoria after the 2014 win, the government and Prime Minister believed that they were smarter than Dr Manmohan Singh and India needed a new direction to its economic policy. They perhaps mistook India to be a speed boat which could take sharp turns and not a massive cargo ship that needed time to turn.

The government got a lucky break when international crude prices crashed. In an election rally in Delhi five years ago, Prime Minister Narendra Modi called himself ‘Naseebwala.’ The government’s additional income from petroleum taxes came to a massive Rs 11 lakh crore but it did not foresee that it would drive down commodity prices and impact agricultural and rural income and even consumption.

The BJP had promised to implement the recommendations of the Swaminathan Commission but they turned the other way. The increases in MSP were marginal and poorly enforced. While these helped keep inflation low, it gradually reduced profitability in agriculture and pushed rural India into deeper distress. The agriculture sector grew at 2.5 per cent during the first four years of the Modi government and the situation has not been very different since. When almost 60 per cent of the population grows at 2.5 per cent, it is bound to impact income and spending patterns but the government continued to look at the stock market as an indicator of the economic health of the country.

In November 2016, the Prime Minister announced Demonetisation. Why the Prime Minister did it is still not clear but the impact is now visible to all. In July 2017, the government brought in GST and marketed it as ‘One Nation, One Tax’ but the manner in which the scheme was implemented only ensured that the informal sector would have serious problems in complying and competing with the big players.

The government spent the next few years in denial, trying to tweak growth numbers and managing headlines. The crisis kept building up, but the government believed that the crisis was a political conspiracy and a few bad quarters did not mean a serious economic crisis. By 2019, however, nothing was left to imagination as the growth figure for Q2 of 2019-20 slipped to 4.5 per cent from 7.2 per cent.

While the decline in growth was bad enough, some other data began to come through and everything indicated that the economy was at its lowest level in the last 40 years. Unemployment was a on a 45-year high, consumption has declined for the first time in 40 years. A paper by former Chief Economic Advisor Arvind Subramaniam indicated that consumer good production has fallen from 5 per cent in 2017-18 to 1 per cent, electricity generation growth is at its lowest in 30 years and export growth rate has slipped from 9 per cent in 2017-18 to -1 per cent.

The most damaging data came from CMIE which looked deep into the unemployment crisis. It indicated that India is becoming a graveyard for dreams as rising unemployment has become a national crisis now. The Sept-Dec 2019 data from CMIE showed that urban unemployment among the 20-24 year-old had reached a massive 37 per cent.

All this has resulted in a situation where those living on the margins, are falling back into poverty. While an estimated 14 crore Indians were pulled out of poverty during the 10 years of the UPA government, an analysis by The Mint indicated that 3 crore Indians have fallen back into poverty in the last six years.

But still former Union Finance Minister Piyush Goel insisted that the economy was ready for take-off, like his predecessor, the late Arun Jaitley had maintained.

Those who believe that one Budget can fix the deep mess, perhaps still believe in magic and fairy tales. They still believe that this government understands the economy and its plans would work. The reality is that this government is part of the problem, not a part of the solution.

“It is not a tiny command and control economy that can be bullied and directed at will. Nor can it be managed through colourful headlines and noisy media commentary,” former Prime Minister Dr Manmohan Singh had said. Headline management may help the markets but is unlikely to benefit the economy.

If the government is serious about fixing the economy, restoring consumption growth has to be the key focus area. With agriculture growing at 2 per cent and manufacturing in the negative zone, more than 70 per cent of the population is now hit by the slowdown.

The recovery process must start with agriculture and fixing rural demand before it does anything else. With almost 60 per cent of the population linked to agriculture, a 2 per cent growth rate in this segment would mean consumption will not pick up and unless that happens, all talk of revival is going to be just rhetoric. The problem, however, is that government has already played the PM Kisaan card and that too has failed to make much of an impact.

A marginal increase in PM Kisaan scheme rate would be cosmetic and serious recovery can happen only when prices go up. But that too will have limited impact as farmers get only a small part of the increased prices. Food inflation reached 14 per cent in December and has reached a point where it is hurting the poor and the working class.

Former Chief Economic Advisor Arvind Subramanian is among the many economists who believe that there is more pain in store for us as things are going to get worse before they get better. The question is how bad will things get and what price will the country have to pay?

The problem for the BJP is that its winning run ended with the Lok Sabha elections and Delhi is unlikely to bring much cheer. Though the CAA-NRC issues have polarised the nation but the shril discourse is unlikely to benefit them politically unless the economy picks up again.

The fact is that the government has pushed itself into a deep economic mess and its goodwill is running out at a rapid pace. The government and the country would be up against serious trouble if the government does not fix it before the end of the year.