Fiscal policy must take centre-stage for a broad revival

News: The third wave of the pandemic is receding but the impact of the pandemic on the economy may last longer. However, response of the government in dealing with the pandemic-induced disruptions can change the scenario.

This article discusses the need to reduce inequality and how fiscal measures can help in that.

Why inequality is central to any attempt at reviving the economy?

One, recent findings by the ICE360 Survey 2021, reveal a decline in income of the bottom 20% of the population by 53% between 2015-16 and 2020-21. However, there is an increase of 39% for the richest 20%.

Two, tax exemptions given to increase private investment have benefited better-off and widened the income divide. The recent data on increased tax collection is a reflection of inequality and consumption largely by the rich. It has given a false sense of economic recovery. On the other hand, rising incomes of the rich have failed to revive the ‘animal spirits’ of the economy.

Three, private consumption in the country is lagging even its 2018-19 level in real terms due to different burdens borne by different segments of the population. There is always more burden on the poor when there is a policy or natural shock to the economy.

Why fiscal policy should take center stage to deal with current slowdown?

First, the government has relied majorly on monetary policy rather than a fiscal route to revive the economy. But easy-money policies in the developed world are tightened sooner than expected. Hence, monetary policy in India is not enough to revive the economy.

Second, private investment has failed to revive, and consumption demand also continues to show signs of weakness. It shows that the current approach is the result of a flawed understanding of economic reality.

Third, policymakers have focused on investment-led growth financed by the savings of the rich, but the real challenge in India is increasing the consumption demand. Indian economy is a demand-constrained economy. Also, capacity utilization is less in India. Hence, an investment push is not enough to help.

What is the way forward?

First, since inflation will further reduce purchasing power, hence, budget needs to ensure that real incomes increase.

Third, there is a need to ensure a leakage-proof delivery of benefits provided to the country’s poor and vulnerable. For example, rural employment guarantee scheme, National Food Security Act provisions and various income-transfer initiatives.

Fourth, the fiscal health of the economy is expected to improve. That is why public expenditure needs to be expanded to ensure social protection and basic infrastructure.

Source: This post is based on the article “Fiscal policy must take centre-stage for a broad revival” published in Livemint on 28^th Jan 2022.