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Jobs in formal sector, bond market reforms — how Budget 2022 should respond to K-shaped recovery

Finance Minister Nirmala Sitharaman will present Union Budget 2022-23 in the midst of a recovery from the Covid-19 pandemic. While economic activity has recovered to the pre-pandemic levels, concerns have been expressed about the nature of recovery.

A recent survey by Mumbai-based think tank People’s Research on India’s Consumer Economy (PRICE) says that during the pandemic the urban poor were the worst hit and saw a decline in their incomes, while at the same time the more affluent formal sectors grew faster. This growth path has been called K-shaped.

Recurring waves of Covid and lockdowns have affected labour incomes, especially in contact-intensive sectors. According to the survey, in 2021, the poorest 20 per cent households earned half of what they earned in normal times. These are often small enterprises like restaurants, shops, parlours, construction activity, etc. The bulk of employment in an economy is in these enterprises. Job losses in these sectors, particularly among micro firms and self-employed, has pushed down the incomes of people engaged in these sectors.

Budget 2022 is expected to respond to the recovery path in different ways. First, it could offer some immediate relief to individuals and households. Second, it could continue to push on job growth through investment in infrastructure and productivity-improving reforms.

Relief to households could be given so as to directly address sections of the population that have been hit. This can be done by making direct cash transfers to the Jan Dhan accounts through various schemes or extension of free food, MNREGA and similar schemes.

However, these schemes will not be able to revive the sector or the firms who have been hit, but rather help the individuals who have been affected by the loss in jobs or incomes. Sectors such as construction, retail, travel, etc. have seen recovery after Covid and will hopefully start hiring workers as activity returns post-Covid.

In addition, therefore, the Union Budget is expected to continue to increase public expenditure on infrastructure. While the impact of infrastructure investment on job growth takes time and has an effect in the medium run, infrastructure gives a push to economic activity, encourages private investment and improves productivity. So, in addition to providing support to those affected by the pandemic, the government is expected to push further to create an environment in which jobs will be created.

Also read: Cut taxes & simplify them. That’s the best option for Budget to spur demand, boost recovery

Create jobs in formal sector

While the poorest need to be supported immediately, the government needs to create jobs and increase productivity in the economy. The focus on public investment in infrastructure and a healthy environment for private investment must remain.

The recovery path for different sectors is also K-shaped. The share of the formal sector in the economy has grown and the informal sector has shrunk during Covid. But should this direction of formalisation continue or should it be reversed? Until now it has been the attempt of policymakers in India to increase formalisation in the economy where productivity is higher and where labour has better working conditions.

Covid-19 has sped up the process which has been in place with GST, digitisation and technological change. The transformation of the Indian economy ahead lies in improving the productivity of small firms and not trying to go back to a larger share of informal labour. In the recovery from the pandemic, the size of the informal sector has shrunk at a speed much faster than anticipated. Thus, there is a greater need for faster job growth in the formal sector to be able to absorb labour that is no longer utilised by informal enterprises. Education and reskilling will be important elements of this.

Disinvestment, bond market reforms

The budget is not only a time for allocating expenditure to different uses. It is also a time when the government spells out economic reforms. Continuing the disinvestment plans for PSUs, bank privatisation and asset monetisation should continue.

One of the big reforms required for infrastructure investment is financial sector reforms. Indian infrastructure is an attractive destination for long-term funds looking for high returns. India’s commitments for net-zero emissions is an additional reason why investible funds from advanced economies, which are looking to finance environment-friendly projects, will find Indian bonds and equity attractive.

India needs to develop a bond market where pension and insurance companies can invest their green finance into long-term investible projects. For this reason, bond market reforms need as much emphasis as public investment in infrastructure. Long due reforms in the debt market create depth and liquidity in the market.

At the same time, an emphasis on jobs requires making it easy and comfortable to start and grow businesses. The process of simplifying the tax system, reducing tax rates, making India part of global value chains and reducing the regulatory burden for firms will attract investment and jobs to India. Union Budget 2022 is an opportunity for furthering these reforms.

Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy. Views are personal.

Also read: 5 factors will shape Indian economy in 2022, and you can be cautiously optimistic despite Covid

Source: The Print

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