Indian economy is passing through the worst economic crisis now. It is reflected in various ways on different sectors. Whatever the reasons behind it - such as global, national, structural and cyclical factors - all recent estimates made by international and national agencies pegged the economic growth rate below 5 per cent.
Recently IMF predicted a growth rate of 4.5 per cent for the current financial year and the minimum time for regaining this abysmal growth rate would be 2 to 3 years. This low growth rate may dash the dream of achieving the objective of 5 trillion-dollar economy in 2024-25. To achieve that tall objective, the required minimum growth rate is a consistent 9 per cent over the time.
The fall in aggregate demand resulted from the low purchasing power of ordinary mass in the society both in urban and rural areas is the pivotal accentuating factor here. This resulted from recent high rate of unemployment in India. The present unemployment rate of 6.1 per cent is the highest in 45 years. The low growth rate in agriculture sector and distress among the farmers worsened the situation.
The stagnant agriculture income due to fall in prices of agriculture produce is adduced as a major reason behind unprecedented hike of farmers suicide in India.
This situation is worsened by the growing inequality in India. In our country, nearly 70 per cent of wealth is cornered by10 per cent of people. The majority are deprived of not only decent income but also the basic wealth, such as land and financial assets.
Another reason for the low growth rate is the low rate of saving, investment and capital formation for the last three years.
A hike in investment and capital stock is essential for improving productive capacity and raising the growth rate.
The present lacklustre performance of financial sector, particularly banking and non-banking financial institutions (NBFIs), played a great role in reduction in investment, capital formation and reduction in aggregate demand.
The threat of growing non-performing assets, not only affected the credit generation of banks, but also the credit deployment of NBFIs which affected unfavourably the activities such as house construction, purchase of automobiles, durable consumer goods etc.
The mass employment generating sectors, such as real estate and construction activities, are at a low ebb today. The situation within the country is aggravated by the global slowdown.
The export and import have declined in the current year. The fall in export income due to global recession, unfavourably affected the export-based industries and consequent growth of unemployment.
Though all sectors are affected by the present predicament, it is very serious in informal sector activities such as agriculture, agro-processing industries, artisans and informal service in both rural and urban areas.
The government is also a casualty of this economic slowdown. The growth rate of tax revenue of the central government has received a setback. The tax-GDP ratio during this financial year is roughly estimated to around 10 per cent, which is lower than the average of last five years.
The direct taxes, such as income tax and corporate tax, would not touch the targeted level. GST collection is much lower than what was expected. This not only affects the financial strength of the central government but also the state governments via the lower or delayed central government transfers such as GST compensation, grants, centrally sponsored schemes like MGNREGA schemes.
The central government is facing a complex situation of weak economic environment along with resource crunch to meet this eventuality. That is why, the Union Budget 2020-21 is a real challenge for the government.
The challenge is how to tackle the situation of low aggregate demand, low growth rate, low saving, investment and capital formation, financial sector doldrums and growing unemployment.
The major challenge for the finance minister is how to balance the twin objective of growth and distributive justice.
If more funds are allotted to growth propulsive factors such as heavy infrastructure projects, recapitalisation of NPAs, investment promotion activities and sops to corporates, the intensity of present economic recession cannot be ameliorated.
The situation warrants for packages and schemes for immediate increase in purchasing power of ordinary people.
There must be schemes and initiatives for transfer of more income directly into the hands of the people, particularly those engaged in agriculture sector and bulk informal sector activities.
Short run gestation projects should get more priority. In addition, the aim should be the creation of quick employment opportunities by initiating the schemes such as MGNREGA or increasing the days of employment through these schemes with a higher wage rate, pumping more resources for invigorating small and micro enterprises etc. We need both growth and distributive justice.
However, for the time being, the government should keep the growth objective to low profile and give more emphasis on distributive justice. The real challenge to be confronted by the finance minister is how to finance the additional commitment within the norm of revenue deficit, fiscal deficit and debt as fixed by the Fiscal Responsibility and Budget Management (FRBM) Act.
The present budget not only reveals the strategy for tackling the economic crisis but also the government stance on the fiscal prudence within the FRBM Act norms.
(Dr V Nagarajan Naidu is a member of Third Expenditure Review Committee, Government of Kerala and former head of the Department of Economics, University College. Views expressed are personal.)