View: India needs one-year programmes that can boost demand during cyclical slowdowns


By Neeraj Kaushal

Last week, the International Monetary Fund (IMF) lowered its GDP growth estimate for India in 2019 to 6.1% from its earlier projection of 7.3%. Observers may find even this slashed target a bit on the high side given that growth in the first two quarters of the calendar year has fallen to 5.8% and 5% respectively, with sector after sector reporting substantial slowdowns.

The economic downturn is global. IMF has projected that 90% of the world economy will grow at a lower rate in 2019 than in the previous year. Industrialised countries have what economists call ‘automatic stabilisers’ that pump funds into the wallets of consumers in times of recessions. Unemployment insurance is one such automatic stabiliser. The idea being that for several months after workers lose their jobs, they receive unemployment insurance, which is often large enough to keep them afloat and let consumer demand from crashing.

Most welfare programmes are anti-cyclical. As unemployment rises and incomes fall, disbursement of cash and near-cash benefits to poor families increase. At the individual level, such programmes reduce economic distress. At the macro level, these programmes increase demand that help propel the economy out of recession.


In India, we do not have any largescale automatic stabilisers that can propel the economy when domestic and global demand are down. Most jobs in India do not carry unemployment insurance. Workers in the public sector have complete job security. The rest, in particular the vast majority in the informal sector, have neither unemployment insurance nor job security. Industrialised countries also offer income-tax relief in recessionary periods. But India has a small tax base, and tax relief would only help the relatively well-off who pay income tax.

In rural India, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is designed on the lines of serving as an automatic stabiliser. On paper, MGNREGA guarantees 100 days of wage employment to every household in a financial year. Thus, in a bad economic year, when demand for labour is low, households are generally assured to get 100 days of work and wage.

A Helping Hand

Launched by the UPA government in 2006, MGNREGA has steadily increased in size over the past five years of BJP rule, from Rs 36,025 crore in 2014-15 to Rs 61,080 crore in 2018-19. However, a common complaint is that wages are often delayed. Last year, 56% of the wage payments were delayed. In the two prior years, payments to over two-thirds of the workers were delayed. In 2016-17, 15% workers seeking work did not get any.

Both factors weaken the effectiveness of MGNREGA as an automatic stabiliser. Further, even at its peak, MGNREGA is not large enough to provide a major boost — it is merely 0.4% of the nation’s GDP. A few other smaller schemes, such as drought relief programmes, are also anti-cyclical. But altogether, these programmes add to create, at most, a modest boost in demand compared to what is needed when the economy is subject to major vicissitudes from the global economy.

Given the structure of the Indian economy, many of the programmes that act as automatic stabilisers in industrialised countries do not work here. So, should India design a programme or set of programmes that can boost demand in times of cyclical slowdowns? And, if yes, what should such a programme be like? In the past, it was difficult to design such a programme because most public schemes created large-scale leakages. However, successful implementation of the Pradhan Mantri

Kisan Samman Nidhi (PM-KISAN) with electronic transfers directly into the bank account of beneficiaries makes it possible for the government to design a temporary scheme that boosts demand. For instance, a PM Grameen scheme, limited to a single year, could be designed that transfers.`6,000 into the account of each rural household in two or three instalments. Similar schemes could be designed for low-income families in urban areas.

Does the current slowdown warrant such an action? A recent RBI report argues that the economy is experiencing a cyclical, and not a deep structural, slowdown. Independent of the global slowdown, 2018-19 was a serious drought year, the third in five years.

Most recent data from Nielsen suggest that growth in rural demand is the lowest in seven years, down to 5% in the quarter ended in September from 20% a year ago. While it is not possible to repeat a 20% growth every year, the fall is noticeable given that rural India has received substantial funds over the past year that should have increased consumption.

Limited Period Offer

PM-KISAN alone pumped Rs 75,000 crore. Several states implemented additional cash transfer schemes, such as the Krushak Assistance for Livelihood and Income Augmentation (KALIA) in Odisha and Rythu Bandhu scheme in Telangana. The consumption slowdown would have been even higher in the absence of these schemes.

An essential aspect of a stimulus package, unlike these earlier schemes, is that it should be limited to one year. Its aim should be to boost demand temporarily, and end the stimulus automatically after one year. The big anti-cyclical fiscal boost given in 2008-09 proved politically so difficult to reduce later that fiscal deficits exploded for years on end. We must avert that.

The writer is professor, social policy, Columbia University, US

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