By Shamika Ravi
“Who exactly does this budget favor?” asked a prominent presenter on national television, disappointed that there was nothing specific for the poor or the middle class in the annual budget announcement earlier in the day. The short answer: the future generation! This year’s budget focuses on reviving economic growth in the country.
It adopts a strategy to deal with the most worrying trend in India’s growth history, that of the decline in private investment over the past 10 years. In simpler terms, this year’s budget is a reinforcement of last year’s economic recovery strategy from the pandemic, but is intended as a boost for long-term economic growth. The basic strategy is to dramatically increase public spending with a focus on asset creation and job creation.
Government expenditures fall into two broad categories: revenue expenditures and capital expenditures. The first includes all government spending that does not create assets or reduce liabilities. These include salaries, interest payments, pensions, administrative expenses, etc. It is very important to note that these are also major social protection programs such as the Food Security Act, MNREGA and several direct cash transfer programs. In the aftermath of the devastating COVID-19 pandemic, several of these programs have helped avert a humanitarian crisis and starvation deaths in India. Unlike the past two years, in this year’s budget allocations, most of these schemes have received a marginal increase, while the bulk of the increase in government spending has instead been concentrated on the second component, spending on capital. These include spending on asset creation, which leads to increased productivity, job creation and long-term growth. Capital expenditure growth for the next fiscal year is budgeted at 24.5% compared to last year’s revised estimates. The chosen avenue for this is the PM-GatiShakti program, which aims to accelerate the development of major infrastructure across the economy and improve connectivity through roads, railways, waterways, airways, etc. economic growth and development. There is compelling evidence from various developing countries that roads reduce poverty.
Unlike the past approach, this government is redefining and expanding the concept of social protection in the country. While existing forms of social protection have focused on immediate relief and short-term approaches through cash transfers, food grains and job guarantees, this year’s budget expands social protection to include affordable housing and access to running water and sanitation. These programs benefited from a significant allocation in the budget. Thus, even from the point of view of social protection, the creation of assets received a significant impetus.
While the government has placed its faith in a long-term economic growth strategy, the trade-off is clearly in terms of immediate consumption and supporting demand. This has raised issues for several understandable reasons. The pandemic has dealt a severe blow to people’s livelihoods and incomes. Fiscal support in response to this has basically focused on the poorest 40% of the population. Our analysis, however, shows that consumption has dropped significantly for the bottom 80% in rural India. This analysis is for rural households (based on available data) but can quite easily be extrapolated to urban households given that the pandemic would have been worse in urban areas of India. Thus, the middle class suffered a decline in consumption levels equivalent to the poorest quintiles of the population.
The economic logic for putting more emphasis on expanding capital spending rather than revenue spending is sound. Evidence from global and Indian data shows that the multiplier effect of capital spending on economic activity is significantly larger than the multiplier effect of revenue spending on economic activity. In fact, the capital expenditure and revenue expenditure estimators have been precisely calculated for India as 2.45 and 0.99 respectively. It therefore makes economic sense to direct marginal government spending to infrastructure and long-term asset creation.
The policy logic of betting on infrastructure development and long-term job creation rather than improving immediate support for consumption is not so obvious, however. In fact, beyond the unemployment figures, it is clear from the Periodic Labor Force Survey (PLFS) data that there has been a sharp drop in income. What is perhaps more striking is that this drop in income is much more severe in states like Uttar Pradesh compared to the rest of India. As shown in Table 1 below, UP suffered a 23% drop in revenue post-pandemic, compared to a 22% drop for all of India. But more strikingly, the data shows that UP youth have suffered one of the biggest drops in income in the country. While across India the decline in income for youth is around -20%, this figure is much higher for youth in UP at over -30%. With the UP heading to the polls in days, it is apparent that the government has avoided populist election measures in this year’s budget announcements. The commitment to long-term growth makes economic sense, but politically it seems like a calculated risk that the BJP government is willing to take. The logic seems to be that patterns such as PM-Awas Yojana and ‘Har-Ghar-Nal‘ will lead voters to the 2022 state elections, just as the massive rural electrification project did in the last state elections in 2017.
Table 1: Decline in monthly income after the pandemic
|(Any population)||2018-19||2019-20||% change in revenue|
|All India||11,302 (11,054–11,550)||9,035 (8,736–9,334)||-22%(-26.3% to -18.5%)|
|Uttar Pradesh||8,654 (8,162–9,146)||6,656 (6,171–7,141)||-23%(-29% to -15.9%)|
|All India||7,291 (7,054–7,528)||5,783 (5,193–6,373)||-20%(-28.7% to -11.7%)|
|Uttar Pradesh||5,065 (4,600–5,531)||3,535 (3,080–3,990)||-30.2% (-40.3% to -18.5%)|
Source: PLFS (2018-19) & (2019-20)
Beyond the main allocations that drive most of the public discourse around the EU budget, several progressive and strategic ideas should be highlighted. Here are a few:
(1) The extension of tax relief to parents and guardians of persons with disabilities is an important measure. Currently, disability in India is a highly privatized issue, where families bear the brunt with minimal public support. This policy blind spot must be rectified immediately, as more than 5% of India’s population is disabled,[i] representing nearly 50 million people. This number will likely be much higher in the next census due to growing awareness and improved reporting from families and health care providers.
(2) Recognition and emphasis on mental health as a public policy concern is welcome. This year’s budget allocates funds to create a network of 23 digital centers to expand telehealth services for mental health. This is to be coordinated by NIMHANS with support from IIT Bengaluru. Of course, mental health, like much of general health care, requires local brick-and-mortar support and a skilled workforce. Hopefully, in the future, these telehealth centers can be expanded and integrated into primary health care centers and wellness centers across the country.
(3) In a welcome (and strategic) move, green finance has found a place in the budget, in the form of green bonds. A major emerging market, India has the potential and the ambition to lead the global energy transition. Although there are many market opportunities, India lacks the necessary financial instruments to attract global investments that can help the country achieve its goals. The green bond has the potential to fill this critical gap for India.
(4) The emphasis on urban planning in the annual budget is a major recognition that cities need planning and cannot be allowed to grow organically as they have done so far in across the country. Today, India is about 65% urban[ii], yet planning and governance are often political afterthoughts. The cost of poor urban planning and governance translates into inefficient administration and a low quality of life for citizens.
Overall, this budget is sound despite the lack of major increases in allocations for health and education. Funding, though critical, is only part of the larger health and education problem in India. Public health and public education need a major overhaul beyond information and technology solutions and quick fixes. For example, in the aftermath of the pandemic, the 2021 budget included a major plan to establish infectious disease wards in every district hospital across India. We should get an update on this – if there are delays, then is it because of insufficient funding or weak state capacity? Unfortunately, the Minister of Finance only has a solution for one of them!
[i] Sagar, R. et al. The Burden of Mental Disorders in the States of India: The Global Burden of Disease Study 1990-2017. Lancet Psychiatry 7, 148–161 (2020).
[ii] Author’s calculations based on Night Lights Data (2018).