As economic indicators and tax receipts improve, evidence of stress begin to appear too
Neelkanth Mishra | Last Updated at November 3, 2020 03:08 IST
(This was published in the Business Standard: link)
While assessing the post-pandemic economy, last month’s Tessellatum (“After the Storm”, October 6), expected upper-income wage earners to exit the lockdown with higher financial savings, and lower-income households to be left with fewer assets and higher debt. Further, with corporate losses only a fraction of the total lost gross domestic product (GDP), it argued that the bad loans for banks would be far lower than feared.
Data released over the past month supports these assessments. As upper-income households have got the opportunity to spend, categories more dependent on them have rebounded first. For example, luxury carmakers have had a strong October, and residential real-estate sales have picked up in the metros. Sales of high-end TVs, refrigerators, and phones have also revived. Even within automobiles, four-wheeler passenger vehicle sales have done far better than two-wheelers. With business momentum improving, the loan collection efficiency of financial firms has crossed 95 per cent, and in several categories is back to pre-Covid levels. Some banks have become comfortable enough with the reduced risk in consumer loans to have started growing their loan books again.
However, even as we breathe a sigh of relief, and hope that upper-income consumption continues so as to sustain the economic momentum (according to the 2012 consumption survey, the top 10 per cent in India consume more than the bottom 50 per cent), the economic scars become clearer too, like the still elevated demand for jobs under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) in October. This was significantly lower than in June but still higher than in October last year. Given the large seasonal volatility in demand for MGNREGA work, absolute year-on-year increases are more relevant than growth percentages: 8 million more people demanded work in October than in October last year, versus an increase of 26 million in June.
It is reasonable to assume that all additional MGNREGA demand is from lost jobs and likely returned migrants. The reverse though, is not true: Many without work in rural areas may not be desperate enough to undertake unskilled manual work for Rs 202 per day (100 days of work per year means Rs 20,200 annually in wages). The urban jobless cannot access these jobs. In the absence of comprehensive indicators, one must rely on newspaper reports for urban distress: The Indian Express carried a report last week of more than 300 families depositing jewellery with a pawnbroker in Kandivali (north Mumbai) for a combined loan of Rs 70 lakh during the pandemic. In another sign of distress, the 2020 Annual Survey of Education (ASER) reports a drop in private school enrolment compared to the last survey in 2018, a rise in government school admission and a jump in the number of students not enrolled from 4 per cent to 5.5 per cent. Not only does this indicate income distress for parents of these children of school-going age, it also means weak income for teachers and those providing other school-related activities such as transportation and school supplies. Education was nearly 5 per cent of total consumption in 2019, and a large source of formal and informal jobs.
On another front, the total spend by foreign travellers to India used to be nearly 1 per cent of GDP. From the perspective of the country’s external accounts, this was offset by Indian tourists spending abroad, but for jobs and income generation, the two are not fungible. However, Indian households unable to spend on foreign travel may spend those savings on goods instead of substituting the spending by foreign tourists. Even as petrol and diesel demand grew in mid-single digits in October, jet fuel demand was down by half.
Activity restrictions continue to get lifted, and some states have now allowed schools to re-open too, but a complete normalisation could take a while.
Encouragingly, as the wealthy start spending, prospects of government tax revenues are improving too. Gross tax collection in August for the central government was 2 per cent higher than in August last year. While September saw a 13 per cent decline versus the same month last year, all of the decline came from corporate taxes, which were down 38 per cent. Other taxes did well in September, and even personal income tax saw positive growth.
Going forward, the prospects look better. The 10 per cent growth in goods and services tax collections last month will show up in October accounts. It is possible, if not likely, that when firms assessed their full-year tax liabilities for advance tax payment for the September 15 deadline, their assessments were far more pessimistic than they are now. This adjustment is likely to show up in the December advance tax payments. The postponement of the income tax filing deadline to end-December suggests that personal income tax payments in December may also pick up. Excise duty collections are already growing, given that the duty per litre of petrol and diesel has nearly doubled. As both petrol and diesel sales volumes were up in October, excise collection is likely to be up even more strongly.
Comfort on tax receipts should help the government raise spending as we enter the seasonally stronger second-half. For reasons difficult to understand, the Centre slowed spending by a fourth in September despite evidence of improving receipts; one hopes this was an aberration.
The argument that India lacks fiscal space gets weaker by the day; it appears to us that the bigger challenge is lack of suitable plumbing to direct funds to the urban poor, informal sector workers and smaller informal enterprises without leakage, misdirection or unintended consequences. News reports of the government working on an urban employment guarantee programme, for example, have raised questions on what it would do to rural-urban migration if the guaranteed wages were much higher than for MGNREGA and on the ability of our cities to absorb a surge in such migrants.
The pandemic has laid bare gaps in the toolkits of governments the world over, not just in India. At the same time, many transformational schemes have emerged out of responses to past crises. As we work to address the shortcomings exposed by the current one, it would nevertheless be useful to remind ourselves that frequently used indicators like auto sales have an upper-income bias. Aggregate demand still needs a boost, if only to absorb the unrelenting balance-of-payments surplus, and substantial increases in infrastructure investments can indirectly help constituents throughout the economy. Further, constraints in the financial sector that were a bottleneck pre-pandemic, are likely to re-emerge in the next few quarters, and need to be addressed.