Budgeting for inclusive growth in the current macroeconomic context

January 21, 2017, 2:54 pm IST in Finding the Center | Economy | ET

Inclusive growth

The literature distinguishes between narrow and broad inclusion. While the first just reduces inequality the second gives broad rights, voice and capabilities to make the excluded active participants. Active inclusion empowers by increasing rewards to work thus creating conditions for the many to contribute to and participate in growth. It suits India’s youthful demographics, growth potential, and emphasis on entrepreneurship, while redistributive strategies may continue to be necessary for persistent poverty.

One attribute of poverty is being trapped in poor quality of consumption, and in goods where there is not much innovation that can create different types of potential. Normally innovation takes place in high end technologies, but we are seeing innovation in technologies that the poor can also use -such as the mobile, payments and financial inclusion.

Research also finds pure income transfers need not shift the poor to dynamic technologies that show continuous improvement. But improving infrastructure and reducing their transaction costs does, since it reduces the relative prices of medium-level technologies for the poor and makes them more accessible. Such technologies tend to have a higher relative price for the poor. If the poor can start using them their opportunities expand. Moreover, a larger market size induces innovation in accessible technologies, which creates jobs and growth.

High end technologies have a higher price so that more innovation takes place in such technologies. A larger market size can induce inclusive innovations in accessible technologies despite their lower price if the skills necessary to develop and use them are more evenly endowed.

For active inclusion, therefore, the budget should work towards raising the returns to work and improving consumer choices. Then productivity, investment and innovation could rise in a virtuous cycle. It should improve human capital as well infrastructure, and reduce transaction costs. Since they are also State subjects, States could be incentivised to spend more on health and education, even as their share in the central budget goes up. The Brazilian bolsa familia, one of the most successful welfare programs, used conditional transfers very effectively to improve human capital. This is the route aadhar based DBTs should take, rather than a generalized pure transfer such as a basic income scheme. It would also be more economical given our current low tax/GDP ratios.

Similar issues rise with respect to gender. To truly empower women, conditions for their participation in work and in society should be improved. Many of their contributions to society are not recognized. Reducing household income tax by the unpaid female care work for upto 2 children and aged parents would help to change this. If the money is transferred to the woman her bargaining power, as well as the quality of a household’s spending, would improve. Research shows that in poor households where men would spend on drink, women spend on goods that improve the household’s prospects.

Spending on higher quality goods stimulates investment and innovation. India’s growth revival after the global financial crisis proved short-lived because it was dominated by consumption oriented towards food where supply bottlenecks existed, so the only result was high inflation. This year the pay commission awards should stimulate a more productive consumption that can reduce excess capacity in industry.

Macroeconomic context

Tax rationalisation: But demonetisation has sharply reduced consumption. Tax cuts and simplification in the tax structure could help revive this with a rebalancing away from luxury goods towards middle class consumer goods, without disturbing fiscal consolidation. Such consumer goods would have more thick linkages improving innovation and productivity through the system. It would also contribute to shifting society to a norm of universal payment of a low tax, thus adding carrots to the sticks used against tax evaders. As more information and other action on black incomes increases the income tax base, use of digital money increases service tax compliance, cross border tax information sharing and reworking of tax avoidance treaties, as with Mauritius and Singapore, increases compliance by cross border capital all improve tax compliance making it more feasible. India’s increasing reliance on indirect taxes, which both rich and poor have to pay, is regressive. Reductions in lower income tax slab rates and higher exemption limits would improve balance.

Other measures to maintain the momentum against black money and plug loopholes include reducing high stamp duties, and taxing agricultural incomes above a threshold. Incentives for adoption of digital payment modes would help shrink the informal sector, creating a rich data base.

Encouraging investment: The government has been trying for long to spend more on capital formation, without much effect on the aggregate numbers, so private investment must be facilitated. A major way to do this is to prepare a package for the banks and industries where asset quality has been allowed to deteriorate and fester. Since the banks are PSBs where the government is the majority shareholder, and the industries are largely in infrastructure, a package could be designed where asset sales are combined with fund infusion to clean balance sheets, thus equitably sharing pain, reviving investment and growth. After the financial crisis the US effectively turned around its car industry and banks with such strategies. Small enterprises are the main creators of employment and have been suffering from the drying up of bank credit to industry, since it is difficult for them to access market instruments.

Global trends: There are positives and negatives in global trends. But given uncertainty surrounding international trade, and a possible rise in US interest rates, which may restrain domestic monetary stimuli, the budget must take the initiative to sustain domestic demand and growth.

The article is based on my comments at the 12th January EPW-Bombay Chamber of Commerce and Industry event on the Budget

DISCLAIMER : Views expressed above are the author's own.


Finding the Center
A balanced independent analysis of issues in economics and politics


Ashima Goyal Ashima Goyal

A professor at IGIDR, Mumbai, she is widely published in institutional and open economy macroeconomics, international finance and governance. She is edit. . .


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