Opinion Budget will deepen inequality, not mitigate it
Clearly, commitments made in the Budget make little sense when there are large gaps between actual expenditures and Budget commitments.
A bigger problem is the change in horizontal devolution suggested by the 16th Finance Commission. This Budget comes at a time of global uncertainties, sluggishness in domestic investment and consumption and distress in personal incomes. These are more or less confirmed by a variety of data sources — both the government’s own data and private surveys. While the Budget may have managed to rein in the fiscal deficit, it has been achieved at the cost of expenditure compression in crucial sectors. Overall expenditure in the revised estimates for 2025-26 is lower by more than Rs 1 lakh crore, a result of lower capital and revenue expenditure. The reduction was large in key areas such as urban and rural development, social welfare, education, health and agriculture. Clearly, commitments made in the Budget make little sense when there are large gaps between actual expenditures and Budget commitments.
The fact that the entire burden of managing sound finance rests on the expenditure cuts in such areas is problematic. Massive handouts to the middle class through income tax cuts and GST rationalisation has led to a massive shortfall of tax revenues. While these tax cuts have failed to revive private investment demand, the strategy of meeting the fiscal deficit target through expenditure compression in crucial sectors is unlikely to revive demand in the economy.
Perhaps nothing warranted more attention than the rural economy given the level of distress and the role it plays in employment generation. Rural wage growth has slowed and has been almost stagnant for a decade. The illusion of a “goldilocks phase” of the economy is primarily driven by the deflationary trend in prices with negative inflation for most agricultural produce. While it makes real growth look better, it comes at the cost of declining price realisation for the majority of farmers. Most major crops have seen farm-gate prices decline and at much lower levels than the minimum support price. An increase in agricultural employment during the same time also suggests a weakening of the non-farm economy.
This Budget was an opportunity to revive the rural economy. The recipe then was clearly a boost to public spending to increase rural demand and kick-start the process of revival of the rural economy. Unfortunately, the rural and agrarian economy hardly finds any emphasis in the Budget, barring customary references. The agricultural sector has seen underspending compared to even budgeted estimates for recent years, with the net result that budgeted expenditure for 2026-27 is lower than the actual expenditure in 2024-25. Much of this cut has happened in crucial programmes meant to increase productivity. There are no allocations for missions for pulses, vegetables and fruits and hybrid seeds. The budget for agricultural research and education is lower than the revised estimates for 2025-26.
While the Budget focuses on plantation crops this year given their importance for upcoming elections in Kerala, Tamil Nadu and Puducherry, there is no increase in budgetary allocations. The focus on plantation crops is in any case necessary given the export potential. So is the case with livestock and fisheries, both of which have shown more than 7 per cent growth in the last decade. But even in these sectors, scheme announcements do not mean any significant increase in budgetary allocations. Unfortunately, there is hardly any mention of any initiative or budgetary allocation for the crop sector, which employs the bulk of workers in agriculture.
For most of the other expenditures crucial for supporting the social sector, there has been a tendency to shift the burden to the states. The latest example is the introduction of VB-G RAM G, which shifts some of the burden of spending to states. This has happened along with a net decline in the transfers to states under centrally sponsored schemes.
A bigger problem is the change in horizontal devolution suggested by the 16th Finance Commission. With changes in the formula for horizontal devolution, better-off states such as Kerala, Karnataka, Haryana, Punjab and Gujarat have seen their share increase. This has come at the cost of a decline in central transfers to the poorer states of Bihar, Uttar Pradesh, West Bengal, Chhattisgarh and Madhya Pradesh. Most of these poorer states suffer from a weak financial position and weak infrastructure and human development outcomes. The combined impact of budgetary cutbacks and financial devolution is likely to be an increase in regional inequality and slippage on essential human development and economic outcomes across the country.
The writer is associate professor, Centre for Economic Studies and Planning, JNU
Share
