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India presented its latest Union Budget (for FY 2022 -23) in early February amid much hope, as the country is still reeling from the aftermath of Covid-19 pandemic, which has lasted for two years.

To deal with the pandemic induced socio-economic crisis, countries across the world  have been announcing policy measures outside of their annual budgets. The Indian government, too, made many such announcements, but given the scale of the crisis, the fiscal response has been inadequate. Even when compared  to the policy measures announced by other countries, India’s fiscal response  has been on the lower side. Thus, the expectations from the annual budget were high, as it was expected to compensate for the inadequacy in the earlier policy announcements.

Looking at the nominal size, total government spending in India is the second largest in the global South after China. It is bigger than even large middle-income countries like Brazil and Russia, both of which have much higher per capita income and per capita government spending. For an economy of India’s size, there was expectation that the latest budget not only help redress the mounting social crisis and enable an inclusive recovery within the country, but also lead the way for implementing innovative and effective policies to deal with such crises in other middle and lower-income countries around the world. Unfortunately, these expectations have largely been dashed.

For one, total government expenditure has been proposed to increase by 13 percent compared to the previous budget, but this increase is much smaller in real terms, after adjusting to remove the effects of inflation. As a share of GDP, the government expenditure is actually set to drop, despite a slight increase in total government receipts.

With the size of the budget increasing by just 4.6 percent of last year’s revised estimates, which is lower than the rate of inflation, which reached 5.6 percent (Consumer Price Index based) in December 2021 (Economic Survey of India, 2021-22), the budgeted total expenditure change is negative in real terms. This would have a dampening effect on the economy, when the need was to expand public expenditure. India desperately needs a social welfare and rural infrastructure investment drive to combat the crisis of aggregate demand. Towards addressing the challenges, and recovering from the pandemic, total government expenditure in India,  was around 4 per cent of GDP last year according to the Financial Transparency Coalition joint report, but some of this was not new spending.

If one looks at the composition of total expenditure, the budget envisages a sharp rise in the capital expenditure, by around 25 percent of previous fiscal year revised estimates. Revenue expenditure, however, is projected to increase by a mere 0.9 percent. Capital expenditure is concentrated in ministries and departments like telecommunications, atomic energy accounting, defence, railways, road transport and highways, housing and urban affairs. Given the high capital intensity of many projects in these sectors, the potential for employment generation is likely to be somewhat muted.

Cuts, instead of budgetary boost

Some initiatives last year provided relief to vulnerable people. However continuing food insecurity, unemployment, and non-remunerative employment, especially in the case of women, means that more needs to be done. These issues should have been the primary focus in the latest Union Budget, generating more employment opportunities in the care economy and increasing consumption at the bottom of the income pyramid.

However, the reality is that the new budget envisages cuts in crucial schemes for education, health, women, children and vulnerable sections of society.

Whilst the health sector for instance saw an overall increase of 16 percent in absolute terms in the new union budget, this amount remained stagnant as a percentage of total spending (2.26 percent) as well as a percentage of GDP despite growing healthcare needs of the population. Moreover provisioning for primary healthcare, through the flagship National Health Mission, remains inadequate, especially given that the pandemic is still ongoing and posing multiple challenges to the health sector.

Meanwhile in education, spending increased in nominal terms but key schemes suffered. The budget emphasises the importance of using technology in education, but the money being spent on programmes encouraging to use TV channels for supplementary education for instance has seen a cut. Another key scheme, breakfast at school scheme, which used to be an important source of food and nutrition security for children, and which already saw disruptions due to school shutdowns in the pandemic, was downsized further.

It has been over 82 weeks since schools closed down, and a sudden shift to remote learning resulted in teachers as well as students having to adapt to online education. The lack of affordable digital devices and internet connectivity across regions and populations made learning harder especially for female students, who already faced socio-economic barriers to learning. Reopening of schools requires higher investments to recruit and train teachers and provide basic infrastructure. In this context there were expectations of a higher allocations in education across different schemes.

Another crucial sector hit has been rural development. The largest demand driven wage employment scheme, the Mahatma Gandhi National Rural Employment Guarantee Scheme (NREGS), providing a minimum of 100 days of guaranteed wage employment in a financial year, is significant to ensure recovery. Despite offering lower wages than market rates, this scheme helped absorb some of the shocks of the pandemic across rural India, providing benefits to around 68 million households last year. The provision for NREGS have remained the same as the previous year. This is clearly insufficient, given that last year’s initial allocation had to be supplemented with additional resources later, because of the large demands for work across rural India.

However, we must remember that State Governments take care of half of the country's overall public expenditure and they account for more than two-thirds of the country's public expenditure on social services and social protection. Hence, the levels of public spending by the State Budgets too should be stepped up, with increased spending  in crucial areas of social sectors and social protection for the marginalised sections.

Some positive news

Not all is bad news. The announcement that crypto trade will be taxed at rate of 30 percent is a step in the right direction, as it would help the country’s income tax department measure the depth of the unregulated trade, which has witnessed a multifold increase in the country since the lockdown. The government says a national regulation policy for crypto currency is under work right now.

Keeping the digital profits tax, a progressive tax on large digital economy companies, is a positive move as well. The 2 percent levy on gross revenues received by non-resident e-commerce operators that was introduced in 2016, is to be phased out as part of a recent agreement with the United States after the approval of the minimum global corporate tax deal, but it stays intact for now.

Overall, the Union government’s strategy of reducing the fiscal deficit by cutting down aggregate spending as a proportion of GDP means that getting the economy and livelihoods back on track will take longer than necessary. This fiscal tightening is coming too soon, and risks an unequal recovery. As millions of Indians are being pushed into poverty and many others continue working in precarious and informal jobs, and with a pandemic that continues to rage, the new Union Budget should have been much more ambitious and fair, for everyone’s sake.

 

Authors work with the Centre for Budget and Governance Accountability (CBGA). A version of this piece was previously published on the the Financial Transparency Coalition website. Views expressed are of the authors, and do not necessarily reflect the position of CBGA. You can reach them at happy@cbgaindia.org and sarah@cbgaindia.org