Surge in capital expenditure, slide in attention to the poor
We may soon be the third largest economy in the world. But budgets like the one for 2023-24, presented last week in Parliament, will ensure that the quality-of-life ranking of the average citizen in the third largest economy is at the bottom quarter of the global list. Rapid growth with fair distribution should be the objective of any budget. And every budget should be assessed by the dictum of the father of the nation, Mahatma Gandhi: “Recall the face of the poorest and the weakest man whom you may have seen, and ask yourself if this step you contemplate is going to be of any use to him”.
The World Inequality Report 2022 placed India among the most unequal countries with rising poverty and an “affluent elite”
What is the condition of the ordinary Indian citizen today? The bottom 50% own less than 6% of the national wealth and less than 15% of the national income. The World Inequality Report 2022 which highlighted the situation placed India among the most unequal countries with rising poverty and an “affluent elite”. The growth in the national income had been decelerating during the NDA period from over 8% to 3.1% in the quarter on the eve of Covid. If we take the average of the four years from 2019-20 to 2022-23, the growth rate would come to 2.7%. The per capita income in 2021-22 is lower than the per capita income before Covid. But the basic assumption of this Budget is that of “a full recovery in FY22 ahead of many nations and (is) position(ed) to ascend the pre-pandemic growth path in FY23”.
The budget, instead of stimulating consumption demand, has decided to cut back on food subsidies
Having declared a state of full recovery by 2021-22, there is little wonder why the budget has turned away from the poor and ordinary citizens. The government claims a reduction in urban unemployment (it is silent on rural employment) and in inflation but both are still on the high side. It remains a fact that the available official data also points to an increase in the people under the official poverty line, for the first time since poverty began to decline during the 1980s.
In the past four years, the per capita real consumption has been growing by less than 5% per annum. But the budget, instead of stimulating consumption demand, has decided to cut back on food subsidies. The nominal food subsidy has been cut by 31% from ₹ 2.87 lakh crores to ₹ 1.97 lakh crores.
Given the reduction in the overall expenditure and fiscal deficit, higher capital expenditure is possible only through a squeeze on expenditure for the poor
Poverty alleviation programmes have been given short shrift. The most important among them is MGNREGS whose allocation has been cut to ₹ 60,000 crores. The actual expenditure in 2021-22 was ₹ 98,468 crores and the expected expenditure in 2022-23 is ₹ 89,400 crores. The total allocation for the National Social Assistance scheme, anganwadis, National Livelihood Mission, nutrition programs have stagnated at less than ₹ 60,000 crores. As a ratio to GDP the allocation for the above anti-poverty programmes has declined from 0.79% in 2022-23 to 0.53%. The other two major programmes are the drinking water and housing with overall allocation of ₹ 1.5 lakh crores and an increase of 13% from the revised estimate of 2022-23, but still below the budget estimate of 2021-22.
The allocation for agriculture and allied sectors including PM-KISAN is 1.4 lakh crores, lower than the budget estimate for 2022-23. The fertiliser subsidy is down by 22% from ₹ 2.25 lakh crores to ₹ 1.75 lakh crores. The allocation for food procurement and market intervention has been reduced from ₹ 72000 crores to ₹ 60,000 crores.
The education and health sector has seen a marginal improvement from the budget estimates for 2022-23, but this is totally inadequate compared to the requirement. As a ratio to GDP, the allocation for education has witnessed a steady decline during the NDA regime from 0.63% in 2013-14 to 0.37% in the present budget.
A public policy that is geared to the creation of a few champion investors leads the minimum government to be a maximum government when it comes to certain favoured corporates. Such a situation does not enthuse the “animal spirits” of the investors
The State governments bear the main burden of social welfare expenditure. This is also going to be adversely affected by a reduction in the Central transfers to the State governments. From ₹ 4.61 lakh crores in 2021-22 it is down to ₹ 3.67 lakh crores in 2022-23. And the current allocation is only ₹ 3.59 lakhs.
Why was the budget of the poor compressed in the above manner and under such dire conditions? The reason is that the government considers fiscal stability paramount for the future. So, it has reduced the fiscal deficit from 6.4% to 5.9% of the GDP. And has reduced the overall government expenditure in relation to GDP from 15.3% in 2022-23 (revised) to 14.9%.
At the same time, the government’s growth strategy involves maintaining the acceleration in capital expenditure during the post Covid period. In 2022-23, capital expenditure has been raised from 3.9% of GDP in 2022-23 to 4.6%. Given the reduction in the overall expenditure and fiscal deficit, higher capital expenditure is possible only through a squeeze on expenditure for the poor. That is precisely what Nirmala Sitharaman has done.
An alternative the finance minister had was to raise more tax resources, a small wealth tax on the super-rich would have done the trick. But the union finance minister does not want to raise more resources from the rich. In fact, the tax GDP ratio has remained at the same level as in the previous year.
India’s economic deceleration was the result of multiple policy failures, and the present budget does not seem to have any new strategy to make up for the mistakes
Now the question arises, will higher capital expenditure through multiplier effects lead to an acceleration in growth? But the puzzle is that despite higher government capital investment private investment is not forthcoming. The Gross Fixed Capital Formation (GFCF) to GDP which was 39% 2010-11 sharply declined and continued to decelerate under NDA to around 31%. Under Covid it fell sharply and has yet to fully recover. An exasperated Finance Minister was heard demanding an answer from industry at a summit in Delhi last September “Since 2019 ... I have been hearing industry doesn’t think [the environment] is conducive. Alright, the tax rate was brought down. …Give PLI (production linked incentive). We have given PLI. I want to hear from India Inc.; what’s stopping you?"
The answer to that puzzle is not simple. Their expectations of consumption demand are an important factor. Besides excessive cronyism and lack of fairness and transparency would be another deterrent. A public policy that is geared to the creation of a few champion investors leads the minimum government to be a maximum government when it comes to certain favoured corporates. Such a situation does not enthuse the “animal spirits” of the investors. It is symbolic that the budget celebrations were rudely disrupted, not by protesting people but by the investors who bid down the share prices of Adani companies.
Whatever the reason, the subdued investment given the level of technology, would imply subdued growth. We have already referred to economic deceleration under NDA. Though even the economic survey has very carefully avoided it from the list of shocks that adversely affected the Indian economy, it was the demonetisation that triggered the downward slip.
Even after a downward slide began, in every budget the NDA regime has pursued a foolish strategy of reducing the overall budgetary expenditure to GDP ratio from 14% in 2013-14 to 12.2% in 2018-19. Though not related to the budget, the situation was confounded by the Reserve Bank adopting a policy of increasing the real repro rate even while inflation was coming down. These policies were reversed only with the pandemic. India’s economic deceleration was the result of multiple policy failures, and the present budget does not seem to have any new strategy to make up for the mistakes.
(Dr. T.M.Thomas Isaac is the former Finance Minister of Kerala)