Relevance : GS Paper III
Theme of the Article
In the heated debate on jobs, the crucial link between macroeconomic policy and unemployment has not been flagged.
Introduction
Innumerable tasks with respect to the economy await the winner of the parliamentary elections now under way, but two may be mentioned and they are connected.
- The first is to review the conduct of macroeconomic policy.
- The second is the employment generation.
Macroeconomic policy in last 5 years
- The government has continued with fiscal consolidation, or shrinking the deficit, while mandating the Reserve Bank of India (RBI) to exclusively target inflation leaving aside all other considerations. This has contracted demand.
- That high fiscal deficits and high inflation per se can never be good for an economy does not justify a permanently tight macroeconomic stance. Both the deficit and inflation have trended downward in the past five years, yet investment as a share of national income has remained frozen.
- A regime of high interest rates can be bad not only for investment — and thus for growth and employment — but also for financial stability. Sharp increases in interest rates can trigger distress.
- If low inflation is achieved via high interest rates it can trigger financial instability in two ways.
- The first is via the direct impact on the cost of financing in a floating interest-rate regime; a higher policy rate translating into a higher borrowing rate.
- Second, if rising interest lowers growth, revenue will grow more slowly for firms.
Both these mechanisms can render once-sound projects unprofitable, leaving banks stressed.
- Inflation targeting as primary focus was instituted in India in 2015. However, there has been a growth of non-performing assets of banks even after a change in the method of classification first resulted in their surging in 2015.
The Unemployment Issue
- In the heated public debate on job creation that we have seen recently, the link between macroeconomic policy and unemployment has not been flagged.
- When policy holds back investment, the prospect for employment growth is weak.
- Macroeconomic policy in India has been contractionary across the board, impacting employment adversely.
- Even as we shift towards macroeconomic policies that maintain the level of aggregate demand, we can assist the unemployed by strengthening the employment programme we already have, namely the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). Three actions may be taken towards this end.
- First, there have been reports that though the budgetary allocation for the scheme may have increased, workers face delay in payment. This is unacceptable, especially in this digital era when beneficiary identification and money transfer are cheap and reliable.
- Second, there is a case for extending the MGNREGS to urban India for there is unemployment there. Of course, some rationalisation of existing public expenditure would be needed to generate the fiscal space needed, but we may yet expect a positive sum outcome when this is done imaginatively.
- Third, a thorough review of how the MGNREGS works on the ground is necessary. In the context, we often find a reference to “asset creation”. This is an important criterion but we need not rule out the provision of public services under the scheme.
- Fourth, the MGNREGS should target the waste dotting our countryside, and when extended to urban India should aid municipal waste-management efforts. We would then have a cleaner environment and have at the same time created jobs.
Way Forward
- RBI must be tasked with far greater responsibility for maintaining financial stability while being granted wider powers.
- Finance Ministry and its nominees on the RBI Board should desist from insisting upon actions that could jeopardise financial stability in trying to quicken the economy.
- RBI needs to reflect on the mindset that leads to publicly lecturing the government of India on the fate of incurring the “wrath of financial markets”.
- The entire gamut of macroeconomic policy in India needs re-thinking.
