Alleviate distress?

India imposed one of the most stringent lockdowns in the world to prevent the spread of Covid-19 infections. The Economic Survey justified this by arguing that it prevented up to 3.7 million Covid-19 cases, but the strategy also caused a massive disruption to economic activity, affecting incomes and employment of those at the bottom of the pyramid.

In response, several economists, including Raghuram Rajan, the former RBI governor and Abhijit Banerjee, who was awarded the Nobel Prize in economics in 2019, argued for putting more money in the hands of the poor to compensate for this disruption. The government did that in 2020-21.

It enhanced allocation under key welfare programmes such as the MGNREGS , provided additional food grains to the poorest at subsidised rates, and made direct cash transfers to over 400 million people.

These measures have been withdrawn in the 2021-22 Budget, which has focused more on boosting capital spending and growth rather than welfare spending. In short, the government is hoping that growth will address the issue.

Budgetary numbers show this clearly. The 2021-22 (BE) allocation for MGNREGS is ₹73,000 crore, compared to an allocation of ₹1.12 lakh crore in the 2020-21 Revised Estimates (RE). This seems to be a cut in real terms even from the 2019-20 allocation of ₹71,687 crore.

Similarly, allocation for National Social Assistance Programme, which was increased to ₹42,617 crore in 2020-21 (RE) from the 2020-21 BE allocation of ₹9,197 crore has been brought down to ₹9,200 crore in the 2021-22 BE numbers.

PM-KISAN, this government’s flagship scheme for boosting farm incomes actually saw a decline even during the pandemic. Against a 2020-21 BE allocation of ₹75,000 crore, the RE number for 2020-21 is ₹65,000 crore, which is also the allocation for 2021-22 BE. The government spent ₹3.4 lakh crore in food subsidy payments to the Food Corporation of India in 2020-21 according to the RE numbers. These cannot be compared with the 2020-21 BE numbers, because the government has rightly discontinued the practice of treating this spending as an off-budget item. However, this too has been brought down to ₹2 lakh crore in the 2021-22 BE allocation. An analysis of spending on important pro-poor heads such as agriculture, social welfare, housing for poor (Pradhan Mantri Awas Yojna) have also seen a decline in 2021-22 BE allocations compared to 2020-21 RE numbers.

The macro takeaway from these statistics is clear. While the government did spend more than what the last budget allocated to this heads, it has decided against continuing its distress relief push in the next fiscal year as things return to normal.

Instead, the spending push has been reoriented towards capital spending, by which the government hopes to boost growth in days to come. This clearly suggests that the government is pinning its hopes on the ongoing economic recovery to take care of those at the bottom of the pyramid.

Union finance minister Nirmala Sitharaman explained this in an interview. “The balance (between welfare and capital spending) is expected to get reset largely by the fact that the money is going only for capital expenditure. When you create windows for capital expenditure, you’re confident that what you’re spending money on is actually asset creation,” Sitharaman said.

“Therefore, the kind of money going into the hands of the people directly, without looking at what it’s going to create — it will create short-term demand, yes — but when it goes through this [asset creation] route, it also gives encouragement for sectors that will help create better roads, ports, other infrastructure facilities. Thus, it’s both a short-term and long-term impact,” she added.

Not everyone is convinced.

“Cutting back on welfare spending at a time when labour markets are in distress and the poor are still dealing with the loss of incomes and livelihoods, and more importantly a wage squeeze due to the pandemic, will only worsen the demand problem in the economy,” said Himanshu, associate professor of economics at Jawaharlal Nehru University.

“There is enough evidence to show that the sequential recovery in the economy was driven by profits, even as employment and wages took a hit. A reduction in welfare spending will increase the burden on the poor and erode their bargaining power in the economy, which will generate headwinds for rural demand going forward,” he added.

High-frequency indicators seem to paint a mixed picture. The Purchasing Mangers’ Index (PMI) for manufacturing in January 2020 was reported at 57.7, significantly above the threshold of 50 which signifies an improvement in economic activity over the previous month. This rise in production notwithstanding, employment went down for the tenth consecutive month, although the pace of decline in employment continued to moderate.