Union budgets can be understood in two ways. The first is as a standard accounting exercise of the government’s revenues and expenditures. Over the years, this has ceased to be a good metric with governments failing to spend what is announced in the budget. While the practice of off-budget entries is now no longer relevant, even revenue projections are much less reliable. But the budget continues to remain relevant as the most important and perhaps the only comprehensive economic document of the government.
It is this second aspect that provides insight into the government’s assessment of the challenges facing the economy and ways to overcome them. These challenges are now obvious with the economy having been through the “Great Indian Slowdown” between 2016-17 and 2019-20 and the pandemic, which followed it. While the fog of the pandemic has disappeared and the associated supply bottlenecks have eased, it is premature to conclude that the economy has fully recovered. Per capita incomes in real terms in 2021-22 are still below the 2018-19 levels and the overall growth between 2016-17 and 2021-22 is at its lowest level of 3.7 per cent for any five-year period in the last four decades.
The fact that the economy was slowing down before the pandemic makes it clear that Covid only exacerbated the already fragile economic situation. The structural factors that led to the slowdown remain, as in the last three years the government’s efforts were directed towards managing the pandemic. The most important of these is the decline in demand, both for consumption and investment. Private consumption accounts for almost 60 per cent of the economy and this engine of growth has failed to fire. The distress is far more serious in rural areas. Rural wages have stagnated for almost a decade now. Farmers’ incomes have either declined or, at best, stagnated in the last five years. Given the state of the rural economy, the obvious strategy for the 2023 budget would have been to find means to enhance rural incomes.
What has been done is the withdrawal of expenditure on almost every head that mattered for rural economic recovery. The budget for the agricultural sector is lower than the allocation last year. In real terms, the budget has declined by 10 per cent at a time when the agricultural sector is going through its worst crisis. The rise in input costs for both energy and fertilisers is likely to get worse with the withdrawal of the fertiliser subsidy. Even the nominal cash transfer that was provided as part of the PM-Kisan has seen a decline in allocation. But then, this budget is no different from others in the last five years. Perhaps the best indicator of the government’s apathy towards the rural sector is seen in the actual investment in agriculture. Public investment in agriculture declined by 0.6 per cent per annum between 2016-17 and 2020-21, the last year for which data is available. This is a period when the agrarian economy has suffered its worst crisis of profitability.
The non-farm sector is now greater in terms of its contribution to the rural economy but has seen a decline in budget allocations. The budget for the Ministry of Rural Development, at Rs 1.57 lakh crore, is 13 per cent lower than the revised expenditure last year and even lower than the Rs 1.60 lakh crore in 2021-22. The National Rural Employment Guarantee Scheme (MGNREGA) has seen its budget decline to Rs 60,000 crore as against Rs 89,400 crore in the revised estimates for 2022-23. Even though MGNREGA wages are only two-thirds of the private market wages, the high demand for work under the scheme is ample proof of the crisis of jobs and earnings in rural areas. This is the lowest amount allocated in the last five years compared to actual expenditure on the scheme. The only scheme that has seen an increase in allocation is the rural housing scheme, from an actual spending of Rs 48,422 crore in 2022-23 to Rs 54,487 crore. With spiraling inflation and even the cushion of free foodgrains having been withdrawn, rural areas are likely to face an uncertain situation.
With the distress in the rural economy spilling over to urban areas and in particular the urban middle class, there were expectations that at least the latter will benefit from the budget. Not surprisingly, the only thing they got was a carrot to shift to the new tax regime, which has failed to take off even after two years of implementation. On the other hand, there was something tangible for the super-rich with a reduction in tax rates. The impact of these is unlikely to spur demand from the middle class, much less from the super-rich.
None of this is surprising given the government’s preference for supply-side interventions even when there is excess capacity in a demand-constrained economy. It is this understanding that is reflected in an almost one-third increase in allocation for investment. A bulk of this is in railways and roads – a much-needed boost to the infrastructure sector. But given the small share of public investment, it is unlikely to be sufficient unless it is accompanied by the private sector increasing its investment. The track record in this regard has, unfortunately, not been very good with the private sector neither responding to rising public investment nor tax subsidies, as were given in 2019. This will have a negligible impact on employment and domestic demand given the low employment elasticity of these investments. Regardless, the increase in investments is welcome. But if this has been achieved at the cost of sacrificing demand, can it revive the economy?
This was the last full budget in which government could undertake serious steps to revive the economy. That required prioritising allocations towards reviving consumption demand, spurring private investment and protecting people from the vulnerabilities of high inflation and a slowing economy. The budget does none of this. The problem with this budget is not accounting but economic policy. It may have done well on the first count but certainly failed as the policy document for economic recovery and sustaining the Indian growth story.
The writer teaches economics at JNU
