Ease distress?

This is one area where the Union Budget has not done much, no matter which way one looks at it.

It is useful to approach this issue from the vantage point of the current fiscal year.

Petrol and diesel prices reached an all-time high in the country despite the fact that crude oil prices have been higher in the past. This is largely a result of the central government taxes not being reduced enough. The government’s flagship distress alleviation programme, MGNREGS, continued to see high demand indicating that blue-collar and unskilled workers were unable to find employment in the larger economy. The trade, hotels, transport, communication and services related to broadcasting subsector of the economy – it is the most labour intensive component of services in India – is expected to face a second consecutive contraction in 2021-22.

Given these factors, it is not surprising that private final consumption expenditure is not expected to reach pre-pandemic levels in 2021-22 and consumer confidence indices, as measured in RBI’s Consumer Confidence Survey in November 2021 (latest available numbers), continued to be significantly lower compared to pre-pandemic levels.

What is the Budget’s plan to take care of these problems? Budget estimate (BE) numbers for Union excise duty collections – these are mostly on account of petrol-diesel taxes – have been kept unchanged at last year’s BE levels. This suggests that petroldiesel prices could increase significantly once the unofficial price freeze due to the state elections ending in March. This is bound to lead to more economic pain, especially for the poor. The fact that the petroleum subsidy burden is now almost negligible — it is just ₹5,813 crore for 2022-23 — means that there will be very little relief even at the targeted level.

The MGNREGS allocation for 2022-23 has been brought back to the 2021-22 BE level of ₹73,000 crore despite the fact that the revised estimate (RE) spending for 2021-22 is expected to be ₹98,000 crore. The 2021-22 allocation itself seems to be far from adequate. An Accountability Initiative brief on the scheme says that 9.1 million households who demanded work under the scheme until December 31, 2021 had not been given work. To be sure, the government’s logic of MGNREGS being a demand driven programme automatically entailing spending over and above the BE numbers is valid . However, it is also a fact that an aggressive boost to spending on MGNREGS-like programmes in the Budget would have generated tailwinds for unskilled wages in the larger economy as well. That wages are subdued in times of high unemployment is a first principle argument in economics.

The fact that food subsidy has been brought down sharply from ₹2.86 lakh crore (RE 2021-22) to ₹2.06 lakh crore for 2022-23 suggests that there will be at least a partial rollback of the scheme which has been providing additional five kilograms of free food grains to 800 million people. At a time when international food prices have risen sharply and even domestic food inflation is beginning to increase, this could take away the limited cushion to household budgets of the poor. On the other side, a reduction in the government’s food distribution programme will also entail a cutback in procurement from farmers, which in turn, will generate headwinds for farm incomes. This when seen with a cut in fertiliser subsidy from ₹1.4 lakh crore (2021-22 RE) to ₹1.05 lakh crore in 2022-23 will be an additional burden on farm incomes. Fertiliser prices are extremely sensitive to petroleum prices, so this reduction could be a result of the government’s assumption of crude price levels.

Does this mean that there is nothing in the Union Budget in terms of palliatives for the distress-ridden sectors? The government has once again taken the credit rather than fiscal spending route to address this problem. It has announced an additional credit guarantee cover of ₹50,000 crore for firms in the distress-ridden hospitality and allied sectors. This has clearly been done in the hope that India will not see yet another wave of the pandemic which has unleashed havoc on the tourism and dining industry. While the decision will not do much to boost incomes, it will at least prevent businesses from going bankrupt due to a liquidity crisis. That apart, the government’s large-scale focus on infrastructural spending should also offer some support to the construction sector, which is a major employer of unskilled workers. As per the first advanced estimates of GDP released on January 7, gross value added in the construction sector in 2021-22 is expected to be ₹10.5 lakh crore, only marginally above the ₹10.4 lakh crore pre-pandemic value in 2019-20.

To sum it up, the Budget seems to have put faith in the trickledown argument when it comes to providing relief to the poor. By hoping to boost overall growth via a capex boost, there is an expectation that some benefits will also percolate down to the poor. Theoretically there is always a possibility of weak demand by the poor dragging down future growth itself. Whether the Budget’s gamble will work or not will only be known over the course of the next fiscal.