1. Letting Down the Bottom Half
The twin challenges in the budget were offering vital income support to poor and vulnerable households which have suffered greatly during the pandemic, while stimulating broad-based recovery in growth. The two goals are intimately connected.
- The survey claims economic growth of 9.2 per cent in 2021-22. But given the low base effect of the pandemic year, it is better to compare real GDP in 2019-20 (the pre-pandemic year) to that in 2021-22. This comparison reveals modest growth of 1.26 per cent only.
- Consumption, which is the largest part of the GDP, is still short of its pre-pandemic value in real terms by 3 per cent.
- Government spending is up 10 per cent while private investment is up by 2.5 per cent, indicating that public investment has driven the recovery.
- Employment has been back to its pre-Covid levels for several months now, but incomes remain stagnant at around 80 per cent of their pre-pandemic levels.
- Multiple smaller surveys show a large build-up of informal debt and households resorting to pawning jewellery to make ends meet. Food insecurity also persists.
Given this macro and welfare context, the budget ought to have substantially increased total fiscal outlay, in part towards capital expenditure and growth, and in part to an expanded safety net.
However, issues arise here:
- During the first pandemic year, the total allocation for MGNREGA was Rs 1,11,170 crore. Field reports and surveys indicated that this was inadequate.
- In the second pandemic year, the budgeted amount was reduced to the pre-pandemic level which was increased to Rs 98000 crore.
- Even this is not adequate, given the prior pending wage payments and the current demand.
- The amount budgeted for food grains delivered via PDS has also been reduced.
- even if households are now earning enough to meet their basic food needs at the pre-pandemic level, provisioning of expanded rations will enable them to devote some resources to other ends, such as paying down debt or increasing consumption on other items.
- This will improve their living standards as well as contribute to increased aggregate demand.
- Last year’s budget allocated Rs 28 crore for the National Programme for Improving Quality of Statistics in India. But the revised estimates show that nothing was spent on this programme and its allocation for the coming year has been reduced to a token Rs 0.01 crore.
The Union Budget scores reasonably well on the continued emphasis on alleviating supply-side problems via infrastructure investment and improving ease of doing business. But it scores poorly on spending that will compensate the bottom half of Indian households for the enormous sacrifices made during the past two years.
2. 5 Questions: The Budget Big Picture
What were the challenges facing the economy?
- India’s GDP has been declining since 2017-18 with only 3.7% growth in 2019-20.
- Unemployment was at a 4 decade high.
- K shaped recovery meant unequal growth and problems in many sectors continued.
- Private final consumption expenditure, which accounts for 56% of all GDP, is below pre pandemic levels.
- Weak consumption also led to low investments due to reduced demands.
- Government spending could also not cover all aspects due to fear of huge fiscal deficit.
What is the budget strategy?
- More focus is on capital expenditure while controlling revenue expenditure- it will give a push to investments.
- Capital expenditure provides better returns (between Rs 2-5 while revenue return is less than Rs1) by creating new jobs and boosting productive assets.
- EG: new roads, ports etc. will lead to new jobs, boost auxiliary industries, increase demand for labourers, engineers etc. This will increase personal income and consumption and lead to more demand. This will further increase private investment to meet demands.
- Tax revenues from new economic activities will also increase.
How is this strategy different from that of US?
- US adopted a massive fiscal response in form of money.
- In India, it was in form of free food grains, employment schemes etc.
- Although US faced a V shaped recovery, it also had to face massive inflation as demand recovered quickly even during supply chain disruptions.
Will the capex push succeed?
- Success depends on how the schemes are implemented.
- Capital assets have a long gestation period, hence benefits will take more time to flow to the common people.
- To the extent that these projects are of a local nature (local roads instead of highway), benefits will be more direct and quicker.
- Some form of direct relief is also needed.
Is there a pattern in the budget?
- Budgets over previous years vary greatly:
- Before 2017 it focused more of loan waivers.
- 2019 budget focused more on DBT
- 2020 budget focused more on disinvestment and privatization which are missing this year.
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