February 01, 2021
Prudent public investment and a robust safety net can stop India from falling off the precipice of the economic cliff
India’s finance minister Nirmala Sitharaman holds up a folder with the Government of India logo, as India’s Chief Economic Advisor Krishnamurthy Subramanian and Minister of State for Finance and Corporate Affairs Anurag Thakur look on, February 1, 2021. (REUTERS)
Let me start with a deceptively simple quiz. In February 2020, finance minister (FM) Nirmala Sitharaman budgeted ₹67,000 crore on health expenditure. In February 2021, it is known that the government spent ₹82,000 crore in health due to the pandemic. Now, FM has announced a health budget of ₹74,000 crore for next year. Does this represent an increase in the government’s health budget or a decrease?
Sitharaman called it a “big increase” because ₹74,000 crore is higher than the original budget of ₹67,000 crore of last year. Of course, last year was an exception. But is it correct to claim that the government will spend more on health next year when public hospitals, health centres and medical practitioners on the ground will have less money than they did last year? This example aptly describes the theme of the budget.
Before the budget, former Prime Minister Manmohan Singh, former FM P Chidambaram and I laid out a blueprint that called for enhanced public investment to spur the economy, until an ailing private sector can recover to steer it. Hence, the bulk of the focus of India’s first budget for the post-Covid-19 era was rightfully on public expenditure and must be assessed through this prism.
The government plans to spend ₹34.8 lakh crore next year. But the government spent ₹34.5 lakh crore last year and, on that basis, this is not a big increase. Again, FM compared it to the original budget expenditure of ₹30.4 lakh crore last year. In nearly every major expenditure head, this was a recurring theme.
The government has budgeted ₹73,000 crore for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) for next year, which is much higher than the ₹61,500 crore budgeted for last year, but significantly lower than ₹111,500 crore actually spent on MGNREGS in FY2021. In reality, demand for MGNREGS work continued to rise even in January 2021, signalling the lack of income opportunities for a vast majority of people.
When the budget for next year is reduced from what was spent last year, it is bound to affect the millions of families that depend on it for their livelihoods, while for the sake of headlines, FM can proclaim that the MGNREGS budget has been increased significantly from last year’s budgeted amount.
The arithmetic sorcery apart, the government has truly increased overall capital expenditure from 13% to 16% of total expenditure, which is very laudable. Government capital expenditure can translate into jobs and incomes for millions and also catalyse demand in the larger economy. While our blueprint was more aggressive in calling for 20% of the total expenditure as capital expenditure, the budgeted increase is a commendable step. There were also some creditable steps to attract private capital for infrastructure investments, which if it fructifies, can help usher in a new growth cycle for the economy.
Ardent advocates of electoral democracy would have gleamed on hearing FM’s unabashed opportunistic but judicious allocations for building roads and other infrastructure in election-bound states, proving the fundamental premise of political science that democracy is the best means to reconcile disparities. FM also provided for a 60% increase in revenue deficit grants to states. Any devolution of powers and resources is a welcome move. Perhaps every state should change its election schedule to April or May, in between national elections.
Phrases such as privatisation and monetisation were bandied about enough in FM’s speech to thrill the stock market, which is easily excitable. Over the last few years, a handful of corporates in the country, through their proximity to the government, have amassed enormous market power that can be severely detrimental to the consumer and the larger economy in the long run. Economic history teaches us that no privatisation is better than crony privatisation. So, while phrases such as “choice and efficiency for consumers” that FM uttered to make the case for privatisation may sound endearing, the devil lies in the details of the process.
The budget also revealed India’s vulnerable macro-economic situation in terms of deficits and borrowing. The transparency measures taken to reduce off-balance sheet financing and include it in the budget are praiseworthy, which should help allay concerns of the international ratings agencies.
It is no secret that India’s economic situation is ugly with soaring inequality, a choked financial system and a nervous private sector. Prudent public investment and a robust social safety net are what can prevent India from falling off the precipice of the economic cliff.
Needless clever-by-half means of proclaiming big increases in public expenditure through arithmetic jugglery will only exacerbate the trust deficit between the government and the real economy. While the budget was directionally right, the government’s penchant for headlines, sophistry and exaggeration cast a shadow on Budget 2021-22.
Praveen Chakravarty is a political economist and senior office-bearer of the Congress
The views expressed are personal