The article suggests the widening of consumer base rather than increasing consumption. To augment that, the government should also direct the spending towards such sectors which would help in broadening of the base.

Prescription for long term growth: Broadening the consumer base

• India entered the pandemic with declining growth and limited scope for a conventional and large fiscal stimulus.
• The NSS 68th round consumption survey indicates that in urban India, the top 20 per cent of the population accounted for nearly 55 per cent of discretionary consumption and 45 per cent of all consumption.
•  The narrow consumption base coupled with uncertainty over the demographic dividend could belie India’s long-term investment attractiveness.
• With or without the pandemic, the prescriptions for long-term growth remain the same — broaden the consumer base.
• This broadening of the consumer base should happen through empowering the low and middle-income consumers.

Why can’t the government just spend to revive growth

• 1) Temporary incomes coupled with job/income uncertainty will induce precautionary savings without any impact on growth.
• 2) With revenues declined, funding of additional expenditure is through higher borrowings.
• Any incremental debt should be seen in the context of future investments being hampered due to current consumption.
• India’s public debt/GDP will likely reach around 85 per cent and the consolidated gross fiscal deficit to GDP ratio could be around 12.5 per cent this year. 

Way forward

• India needs to broaden its consumer base beyond the top 10-20 per cent of the population to improve long-term growth prospects.
• To achieve this we will need well-paid employment for the bottom and middle segments.
• The “safe” group of India’s workforce is extremely small.
• The PLFS 2018-19 report places around 24 per cent of the workforce in the regular wage/salary category.
• Within this segment, around 40 per cent do not have a written contract, paid leaves, or security while 70 per cent do not have any written contract.
• These sharp skews in consumption and labour become a substantial risk for a consumption-led growth in the aftermath of a crisis.
• The PLFS 2018-19 report indicates that around 50 per cent of the rural non-agriculture workforce.
• 35 per cent of the urban workforce is engaged in the construction and manufacturing sectors.
• The rebuild and recover phase should aim for a wider consumer base with infrastructure and manufacturing as the two pillars.
• To make manufacturing easier, the focus should be on labour reforms, fewer/quicker approvals, reducing the compliance burden, and promoting export-oriented sectors.
• Policies should not become too inward-looking such that export promotion becomes difficult.

Directing public spending and policies appropriately

• Most public spending should be directed towards roads, railways, infrastructure, healthcare and educational facilities.
• To promote infrastructure creation along with private sector participation, the government needs to charge an economic price for goods and services such as power, irrigation, and public utilities.
• Establish the rule of law with minimal interference in pricing, streamline processes for quick approvals and ensure timely payments to private operators.
• The government should also signal its vision along with a financing strategy through sharper expenditure management, enhanced market borrowings, setting up of a Development Financing Institution, and an asset monetisation programme.

Conclusion

To achieve economic growth of 7-8 per cent the government needs to start addressing large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles.

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