Creating jobs by increasing capital expenditure is the government's preferred mantra now
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Unemployment in India – Job creation through capital expenditure
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- The story: There is little doubt in the fact that new jobs generation in India has lagged behind the GDP growth. Now, International Labour Organization (ILO) data suggests India’s employment to population (over the age of 15) ratio has decreased from 55% in 2005 to just 43% in 2020. It was 52% in Bangladesh, 63% in China and 73% in Vietnam in 2020. To make it worse, women formed just 20% of India’s workforce while in other three countries, they formed around 30% to 70%. According to Centre for Monitoring Indian Economy (CMIE) data, across manufacturing and services, India lost nearly 1 crore jobs between December 2016 and December 2021. That is a horrible figure by any standards. Keeping all this in mind, in the 2022-23 Budget speech Finance Minister Nirmala Sitaraman announced that government will allocate money towards productive infrastructure investments to revive the economy and create substantial employment. Not everyone is convinced though.
- Key points: For the next fiscal year FY23, the government has increased the capital expenditure (or investments into productive capital creation) to ₹7.5 lakh crore, 24% higher than the FY22 revised estimate of ₹6 lakh crore. Between FY11 and FY21, capital expenditure averaged just 12% of the government’s overall expenditure.
- For the current FY22, that ratio increased to 16%, and for FY23, the government has proposed to take it to 19%.
- It is expected that sustained investment in roads, railways, freight corridors, power, renewable energy along with initiatives such as Production-Linked Incentives (PLI) and other enabling legislation will create the conditions for drawing in private sector investments into manufacturing, and foster job creation and sustainable growth.
- Importance of creating jobs: To realise the economic potential of India, profitable jobs for underemployed youth and women is an important pre-condition. But in an economy affected by the COVID-19 pandemic, the government has struggled with enabling creation of sustainable jobs.
- Tax collection increased: Data by the Controller General of Accounts (CGA) show that because of higher-income tax and Goods and Services Tax (GST) collections, for the first nine months of the fiscal year 2021-22 (FY22), the Centre’s revenue receipts across taxes and dividends stood at ₹17.3 lakh crore, just shy of the full-year budget of ₹17.9 lakh crore. For the first time in many years, despite the pandemic and the challenges of unorganised sectors, tax collections for the fiscal year will end ahead of the Budget projections. A sustained momentum in tax collections will provide an additional amount of fiscal policy freedom to the government as they try to foster domestic jobs and output.
- Concerns: Not all the capital expenditure is indicative of fresh greenfield investments. The ₹0.5 lakh crore of clean-up of Air India’s books counts as capital expenditure. Similarly, for FY23, the government has set aside ₹0.8 lakh crore to partly clean up the books of NHAI and BSNL. While there is a visible thrust on hard capital expenditure, the outlays towards critical areas such as education, healthcare and urban infrastructure remain subdued.
- Investments in these areas are more critical than the hard infrastructure. The thrust on capital expenditure has resulted in higher fiscal deficit numbers than expected.
- High fiscal deficits put pressure on interest rates and the Reserve Bank of India, risk of inflation, higher current account deficits, and threaten financial stability.
- Effective execution and implementation of the proposed measures is crucial.
- With the provision of funds for the infrastructure thrust, the Central, State, and local administrations have to work together to ensure that these funds are utilised in a timely manner, and result in the delivery of world-class infrastructure.
- The ease of doing investments have to be addressed, especially around key areas such as land acquisition, contract enforcement, and policy stability.
- A general critique of Modi government has been that it's a supply-side focused government, not a demand-side focused one. What that means is that it is not willing to put money directlty in hands of households via cash transfers, but expecting it to happen indirectly via structural reforms of the economy.
- Summary: Sustained investments in manufacturing and value-added services hold the key to the growth of small businesses, jobs, and economic well-being. To realise its full potential of fostering growth and creating employment the government have to address the risks and challenges associated with the increase in capital expenditure. Unless the push to higher labour force participation rate (LFPR) comes from the top political executive, things may not really happen.
- EXAM QUESTIONS: (1) What is meant by "capital expenditure"? Analyse the impact of increasing capital expenditure in the Union Budget for job creation. (2) To achieve the dream of becoming a $ 5 trillion economy, investments in human capital is crucial. Critically analyse. (3) Why and how did India's labour force participation rate, and especially that for women, collapse so rapidly in recent years? Analyse.
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