Massive infrastructure spending has been a crucial differentiator for China, and the key driver of Chinese labour productivity. It is estimated that during the 30 years post Chinese economic reforms (in late 1970s), spending on infrastructure ranged between 10-20% of its GDP. While the jury is still out on whether this led to the current miseries, it certainly gave a massive fillip to labour productivity, which for long expanded annually by 4%. Highly productive and cheap labour, emerging infrastructure, strong foreign inflows, and rising ease of doing business created a virtuous cycle of growth, employment, and household income, till political overtures disrupted the growth story post COVID-19.
As the China growth story peaks, there is a great opportunity for India to shift gears and grab the vacuum. Taking a leaf out of their economic recipe, rising labour productivity could hold the key for a sustainable growth trajectory in India. For a populous country with sizeable agricultural workforce, the best way to leverage on India’s demographic dividend is by ensuring the workforce is empowered with hirable skillsets, for fruitful value adding employment.
Extensive public capex in recent years, particularly focused on augmenting road, rail and energy infrastructure, is the appropriate approach to attain this. It is estimated that in 2024, infrastructure projects of INR 19.5 trillion will be delivered, 70% of which will be in these three segments (a rise of 7X compared to 2015, and 18X in 2010). This explosion of infrastructural facilities will have a strong trickle-down effect on skill development, productivity and finally job creation, if the Government, aided by private sector, keeps this momentum going for the next decade.
India has been a late starter in spending on large scale infrastructural development. Post ‘91 economic reforms, infrastructure spending as a percentage of GDP remained less than 2% for a significant period. In recent years this has risen to 3%. It needs to grow further, along with adequate co-investments from the private sector. This would require a sharp rise in capital flows, especially debt capital. Currently, corporate credit to GDP ratio in India is among the lowest at 55%, compared to world average of 148%. This inadequate supply of credit should become the area of focus in budgets over the next few fiscals. Debt availability is going to be the raw ingredient for implementing programmes like National Infrastructure Pipeline and Gati Shakti.Bridling fiscal deficit is a potent way of encouraging higher credit flow, as it will ease crowding out of private borrowers from debt markets and at the same time lower borrowing costs. Additionally, Non-Banking Financial companies need to be supported to complement banks in easing credit flow to the remotest part of the country. Finally, corporate debt markets need to be further deepened to accommodate lower credit rated firms which are mostly MSMEs. All of these will have a positive impact on job creation through multiple routes, like expansion of manufacturing activities aided by a strong road network, cheaper energy costs and lower logistic expenses.The updated KLEMS database indicated a sharp revival in agricultural employment, post COVID-19 suggesting Indian workers are once again falling back to farm employment. Between FY15 to FY19, agricultural employment used to decline by 30 lakhs every year (average), implying rising urbanization and reducing disguised employment within agriculture. But between FY20 and 21, this rose by 2.5 crores. COVID-19 has also led to a decline in labour productivity across industries. Mass employing industries like mining, food processing, textiles, chemicals and plastics witnessed a contraction in labour productivity post COVID suggesting worsening employment conditions. It is necessary to restore the pre-covid trends and step up rural urban migration.
The recent focus on infrastructural development can attain this as it encourages greater industrialization, leading to non-agricultural jobs. Also, since we have 70% of India still living in rural areas and more than 40% of the workforce employed in agriculture, non-farm rural enterprises should be encouraged as they can mop up surplus agriculture labour. This can be an intermediate step for imparting on-the-job non-agricultural skills to a large share of workforce. Government schemes aimed at this, like the PM Vishwakarma and PM SVANIDHI, need to receive higher allocations and mandates to associate with non-banking lenders, like NBFCs and MFIs.
To conclude, asks from this budget are summarized below:
- Continue with fiscal consolidation and bring down deficit to less than 4.5% (of GDP) by FY26. This will meaningfully lower corporate bond yields and get an Indian sovereign rating upgrade.
- Judiciously use the surplus generated from RBI dividend, surplus tax mop ups and lower FY24 deficit. Most likley an additional fiscal space of Rs 3.5 Tn can be generated, which should be deployed in augmenting rural non-farm rural employment. This will help arrest rising agricultural employment and divert labour to more value-added employment.
- Higher focus on economically weaker sections especially women. These should be pegged to milestone-based cash distribution, instead of plain vanilla transfers.
- Continued focus on public capex, especially mass infrastructure involving road, railway, and energy, since private capex still sometime away owing to hawkish monetary policies.
- Pave way for higher participation of non-banking lenders through government schemes like PMAY, PM VISHWAKARMA etc.
(Debopam Chaudhuri is the chief economist at Piramal Group)