Government Policy: Helping Households Improve Quality of their Life without an Increase in the Cost of Living
In a country like India, it is imperative for each family to not only save as required but also invest wisely
The nature of earnings, consumption and investments determine a family’s quality of life. A household that experiences a consistent growth in inflation-adjusted or real earnings is expected to have greater freedom in making life’s choices. A consistent growth in our real earnings not only allows us to expand our consumption basket, but it also enables us to invest in children’s education and health, take care of elders in the family and save for our own retirement.
Increased life-expectancy implies that a typical urban family would need to provide for 20+ years of retirement life, which will be financed largely by earnings from savings or depletion of these savings that the family accrues during the earning years. In a country like India where we are expected to take care of ourselves during our post-retirement period, it is imperative for each family to not only save the required amount but also invest it wisely.
Our Cost of Living will Experience ‘Structural Upwards Shifts’ as the Economy Grows
India is a low-middle income country and is expected to experience structural shifts in cost structure often caused by asset price inflation or increased consumption of higher value-adding, better-quality products or simply the inflation. For example, we experienced a period of 15-20 per cent annual growth in home prices from 2007-08 to 2015-16. As the income grows, we also expect life-style related costs to go up, e.g., durables, travel, dining out of home, leisure, etc., implying an increased propensity to consume and, therefore, the higher cost of living.
A structural shift in cost, combined with an increased propensity to consume, will result in a fall in our saving rate, unless the earnings keep pace with these cost increases. Not surprisingly, India has been witnessing a fall in household savings rate during the last decade – the household savings rate has declined from a peak of 25.2 per cent of GDP during 2009-10 to 18.1 per cent during 2018-19.
Periodic Revision in Wages through Pay Commissions Helps Raise Earnings Across Sectors
India has used pay commissions to compensate the government and public sector employees every decade for such structural shifts in cost of living and providing increased income for raising their standard of living. In addition, the government staff gets compensated for inflation through dearness allowance increases. Given the government wages are often used as reference for wages in the private sector, the private sector employees also benefit (indirectly) from pay commission awards. An increase in earnings for a household is an increase in cost for the economy. Therefore, an economy needs to focus on value-creation and productivity improvement for creating a virtuous cycle that results in better standard of living without an increase in the cost of living.
Fiscal Policy Choices and their impact on Quality of Life and Cost of Living
The government resource mobilisation and allocation, through its fiscal policy choices, also has an impact on family incomes and costs. An increase in taxation reduces a family’s ability to spend or invest if it is not followed by a commensurate reduction in cost of living or an improvement in quality of life. For example, the recent increases in duties and cesses on petrol and diesel increases the household expenditure on private transportation, if these taxes are not used for improvement in public transport or quality of air.
It is not necessary that the taxes raised on one commodity are used in the same area. But any increase in tax must get spent in areas that help improve quality of life in the short to medium run. For example, public investment in education and healthcare helps improve quality of life and potential for earnings, as it makes both these services affordable for low-income families.
In many developed countries, the government either provides income support for supplementing the household earnings during the post-retirement period or makes provision for public education, housing and healthcare services.
Monetary Policy Choices and their Impact on Earnings
A market-based system is expected to experience economic cycles that are characterised by variability in economic activity. During the recent years, the Indian government has resorted to reduction in policy rates to help drive investment and consumption growth, but only with partial success – investment and consumption growth has continued to be low since Q3/Q4 of fiscal year 2017-18. In fact, growth in gross fixed capital formation had turned negative during Q2 of 2019-20 and the growth in private final consumption had stagnated around 6 per cent during the same year.
Covid-19 has made matters worse. As consumption and investment growth have fallen, the government has reduced the rates further. While it is not certain if the lower rates drive higher investment, it is definite that they impact household interest earnings. A reduction in interest earnings not only lowers the earnings, but it may also result in lower propensity to save, which, in turn, can impact the country’s ability to invest in future. Indian households are the major providers of capital for business, as they still contribute about two-thirds of the total savings in the economy.
We Need Government Support to Deal with Economic Uncertainty, Caused by Nature
During the recent years, the changes in nature of employment, i.e., an increase in proportion of self-employed and contract workers, have also resulted in lowering the quality of earnings (low initial wages and limited or no increase in real earnings, combined with short-term contract or gig work) for low and low-middle households. Consequently, any economic uncertainty results in a loss of earnings for many such households. The pandemic has made us acutely aware of this problem.
Events like failures in monsoon or the Covid-19 pandemic hold back large number of households from participating in economic progress. In such a situation, it becomes imperative for the government to support households through investment in public provision of quality education and healthcare and earnings-support programmes (including those for senior citizens) in urban as well as rural areas so that an average household can look forward a better quality of life without experiencing large changes in costs of living. From a long a perspective, it is also important to let interest rates be at a level that encourages savings as well as investment and not one at the cost of other.
The author is Co – Founder, IASCC
DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.