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GS Paper: GS3-03.Government Budgeting

  • Doubling Farmers’ Income: An Assessment

    Doubling

    Central Idea

    • Recently, Prime Minister shared his dream of doubling farmers’ incomes in the year when India completes 75 years of Independence and enters Amrit Kaal. Now that we have entered Amrit Kaal, it is a good time to revisit that dream and see if it has been fulfilled, and if not, how best it can be done. It was a noble dream because unless the incomes of farmers go up, we cannot have sustained high growth of overall GDP.

    What is Doubling Farmers Income scheme?

    • Doubling farmers’ income is a target set by the government of India in February 2016 to be achieved by 2022-23.
    • To promote farmers’ welfare, reduce agrarian distress and bring parity between income of farmers and those working in non-agricultural professions.
    • Doubling Farmers Income can directly have a positive effect on the future of agriculture.

    Doubling

    Doubling Farmers Income: A Noble Vision

    • Improved Farm Machinery and Advanced Technologies: If the income earned by the farmer is doubled, they will have access to better farm machinery and advanced technologies, leading to increased productivity, better quality of seeds, and improved farming techniques.
    • Increased Agricultural Productivity: Doubling farmers’ income means increasing agricultural productivity, which is essential for meeting the growing demand for food in the country.
    • Improved Quality of Crops: Increasing the income of farmers will not only increase agricultural production but also improve the quality of crops, which is crucial for ensuring food security and meeting quality standards for exports.
    • Growth of Indian Economy: Doubling farmers’ income will contribute to the growth of the Indian economy by increasing rural demand for goods and services, creating employment opportunities, and boosting overall economic growth.
    • Reduced Incidents of Farmer Suicides: Financial stress is one of the leading causes of farmer suicides in India. Doubling farmers’ income will provide them with financial security, which will reduce the incidents of farmer suicides and improve their overall well-being.

    Government efforts in this direction

    • Fertilizer subsidy: Fertilizer subsidy budget crosses Rs 2 lakh crore. Even when global prices of urea crossed $1,000/metric tonne, the Indian price of urea remained flat at around $70/tonne. This is perhaps the lowest price in the world.
    • PM-Kisan: The government has allocated Rs 60,000 crore to its flagship PM Kisan Samman Nidhi Yojana for the financial year 2023-24.
    • PM Garib Kalyan Anna Yojana: Further, many small and marginal farmers also get free ration of at least 5 kg/person/month through the PM Garib Kalyan Anna Yojana.
    • Subsidies and crop insurance: There are also subsidies for crop insurance, credit and irrigation (drip). States also dole out power subsidies in abundance, especially on irrigation. Even farm machinery for custom hiring centres is being subsidised by many states.

    Evaluation: Impact of all these policies on farmers’ incomes and on environment

    • Impact of Input Subsidies and Output Trade Policies on Farmers’ Income: While Input subsidies help raise farmers’ incomes by reducing the cost of inputs such as seeds, fertilizers, and irrigation. Output trade and marketing policies adopted by the government, such as the ban on exports of wheat or the 20% export tax on rice, can suppress farmers’ incomes.
    • Pro-Consumer Approach: The current policy approach is pro-consumer rather than pro-farmer, which is a fundamental problem with our policy framework.
    • Environmental Damage Caused by Subsidized Inputs and Uncontrolled Procurement Policies: The excessive subsidization of inputs like fertilizers and power, coupled with uncontrolled procurement of paddy and wheat in certain states, is causing severe environmental damage. There is a growing need to rationalize these policies.

    Doubling

    Way ahead

    • It is crucial to assess the net impact of input subsidies and output trade policies on farmers’ income to understand where they stand.
    • Realign the support policies keeping in mind environmental outcomes.
    • Millets, pulses, oilseeds, and much of horticulture could perhaps be given carbon credits to incentivise their cultivation. They consume less water and fertilisers. We need to make subsidies/support crop-neutral.
    • It is crucial to adopt policies that are pro-farmer and promote their interests, support income growth, and enhance overall economic growth.
    • Agriculture today needs innovations in technologies, products, institutions and policies for more diversified high-value agriculture that is also planet friendly.

    Notes for Good marks

    Agriculture: Crucial sector of the Indian Economy

    • Employment: Agriculture engages the largest share of the workforce (45.5 per cent in 2021-22 as per PLFS). Agriculture provides direct employment to around 50% of the Indian population, and it indirectly supports the livelihoods of millions more in allied industries such as agro-processing, transportation, and marketing.
    • Food and nutritional security: Agriculture is essential for meeting the food requirements of the country. India is one of the largest producers of rice, wheat, and other cereals, and it is also a significant producer of fruits, vegetables, and spices.
    • Contribution to GDP: Agriculture is a significant contributor to India’s Gross Domestic Product (GDP), accounting for around 17% of the country’s total GDP.
    • Foreign exchange earnings: India is a leading exporter of agricultural products such as Basmati rice, spices, tea, and cotton. The export of these products earns valuable foreign exchange for the country.
    • Rural development: Agriculture plays a vital role in the development of rural areas by providing employment and income opportunities, promoting entrepreneurship, and improving the standard of living in these areas.
    • Environmental sustainability: Agriculture is closely linked to the environment, and sustainable agricultural practices can help conserve natural resources, reduce carbon emissions, and promote ecological balance.

    Doubling

    Conclusion

    • On the question of doubling farmers’ income, we must realize it is going to take time. It can be done by increasing productivity through better seeds and better irrigation. It will have to be combined with unhindered access to the markets for their produce. Further, diversifying to high-value crops, and even putting solar panels on farmers’ fields as a third crop will be needed. It is only with such a concerted and sustained effort we can double farmers’ incomes.

    Mains Question

    Q. What do you understand by Doubling famers income? Enumerate the efforts taken by the government and what needs to be done to achieve the target?

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  • Capital Expenditure (CAPEX): Crucial Role Of The States

    Expenditure

    Central Idea

    • The budget’s clear thrust towards capital expenditure is evident in the 33% increase in its allocation. The primary goal of this allocation is to bolster aggregate demand in the short term and enhance the economy’s productive capacity in the long term. This strategy is widely regarded as beneficial, especially considering the crucial role that infrastructure plays in the growth and development of any economy.

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    Capital Expenditure of the states

    • Capex of the states exceed than the central govt: The combined spending of Indian states on capital expenditure now exceeds that of the central government.
    • For example: In 2021-22, this figure combined for states and Union territories, according to budget estimates, was ₹10.5 trillion. The Centre’s effective capital expenditure that year was ₹8.4 trillion, including ₹2.5 trillion as grant for creation of assets.

    What is Capital Expenditure (CAPEX)?

    • Capital expenditure refers to investments in upgrading existing or building new physical assets by the government or private businesses.
    • As businesses expand, capex has a multiplier effect on the economy, creating demand and unleashing animal spirits.

    Main types of Capex

    • Infrastructure development: This includes building and upgrading public infrastructure such as roads, highways, railways, ports, airports, power plants, and water supply systems.
    • Defence and security: This involve the acquisition and maintenance of defence equipment, weapons systems, and other security-related investments.
    • Social sector spending: This includes investment in areas such as education, healthcare, and social welfare programs to improve the quality of life of the citizens.
    • Rural development: This includes spending on agricultural and rural infrastructure such as irrigation systems, rural electrification, and rural housing.
    • Capital investments in public sector enterprises: The government may also invest capital in public sector enterprises to improve their efficiency and profitability

    Key reasons why the Indian government emphasizes Capex?

    • Promoting economic growth: Capital expenditure is critical for promoting economic growth by creating demand for goods and services, boosting private sector investment, and increasing employment opportunities. By investing in infrastructure, the government can provide the necessary framework for businesses to grow and thrive.
    • Improving public services: Capital expenditure is required to build and upgrade public facilities such as hospitals, schools, and water supply systems, and provide necessary equipment and supplies. This investment in public services is crucial for improving the quality of life of citizens and promoting social and economic development.
    • Infrastructure development: It is critical for promoting trade, commerce, and investment, and improving the country’s overall competitiveness. By investing in infrastructure, the government can create new economic opportunities, support the growth of existing industries, and attract foreign investment.
    • Creating employment opportunities: Capital expenditure creates employment opportunities in the short term through the construction of infrastructure projects and in the long term by supporting economic growth and promoting private sector investment.
    • Attracting private sector investment: The government’s emphasis on Capex can also help attract private sector investment by providing the necessary infrastructure and a favourable business environment.

    What are the concern over State capex?

    • Uneven capacity CAPEX: One general macro-economic challenge is to address this uneven inclination of states or capacity for capital expenditure, which adds uncertainty to the impact of an expansionary fiscal policy led by capex, thus weakening its potential benefits.
    • The ultimate aim of all CAPEX is to enhance the productive capacity of the economy: The nature of state capital expenditure drawn in is also vitally important. Ideally, the nature of state capital expenditure drawn in by central capital expenditure should be such that it dovetails with the latter to optimize long-term enhancements of economic capacity.
    • States have tendency to postpone capex: The Union budget for 2023-24 encourages states to make reforms in urban local bodies to become creditworthy for municipal bond issuance. However, states have a tendency to postpone capital expenditure until revenue streams firm up.

    Way ahead

    • States need to improve their execution capacity and establish an enabling regulatory environment to ensure quality and speed of expenditure.
    • The planning and budgeting cycle of states should also be aligned with fund releases to fully utilize resources within the available time.
    • States play a crucial role in capital expenditure and must not only budget more but also spend fully and uniformly throughout the year.

    Conclusion

    • States need to prioritize timely and efficient execution of capital expenditure and fully utilizing budgeted capital amounts uniformly throughout the year. The RBI report, while acknowledging that Indian states made higher capital outlays in 2022-23, notes that states would do well to mainstream capital planning rather than treating them as residuals and first stops for cutbacks in order to meet budgetary targets.

    Mains Question

    Q. What do you understand by Capital Expenditure (CAPEX)? Highlight the concerns over capex by the states and suggest a way ahead.

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  • Invest In People For The Brighter Future

    Invest

    Central Idea

    • The world is indeed looking up to the Indian economy as a bright star, as the finance minister noted in the Budget speech on February 1. In 2020, India accounted for 20.6% of the worldwide population of 15- to 29-year-olds. Which means that in the years ahead, one out of every five workers deployed globally could be an Indian. No doubt, the rest of the world foresees a fortune in India’s young population. But are our policymakers doing enough to realise the possibilities that are unfolding?

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    The key proposals in this year’s Union budget are the following

    • Increase in capital expenditures for infrastructure: There will be a considerable increase in capital expenditures, for the building of physical infrastructure, mainly in transport, energy and defence. The figures under this head are expected to be higher in 2023-24 compared to the corresponding level in 2022-23 (revised estimates).
    • Modest tax revenue: The growth of the tax revenues is going to be modest, the government is nevertheless committed to reducing the fiscal deficit to 5.9% of GDP. That could have been achieved only by reducing the spending on some other sectors
    • The axe has fallen on subsidies and social sector expenditures: Compared to its previous year, in 2023-24, the Union government’s expenditure on food subsidy will fall by ₹0.9 trillion (or 90,000 crore), on fertilizer subsidy by ₹0.5 trillion, and on the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) by ₹0.3 trillion.
    • Marginal increase unlikely to make impact: The marginal increases in the allocations on health, education, agriculture and the Angwandi scheme are unlikely to make an impact, after taking into account the effect of inflation.

    Public-private complementarities

    • Capital spending indicates country’s productive capability: A jump in capital spending by the government, as proposed in the Budget, is a much-needed step to reinvigorate the Indian economy. Investment as a proportion of income or GDP indicates the rate at which a country’s productive capabilities are growing.
    • High rates of investment; Fast rates of economic progress: In India, this proportion rose steadily during the mid-2000s and peaked at 42% in 2007, which was even better than China’s record at that point in time. High rates of investment translated into extremely fast rates of economic progress in the country, which lasted until the early 2010s.
    • Crowd in Private investments: If the proposed investments by the government come through, and they indeed crowd in private investments as the finance minister has predicted, that can set the stage for a revival of the Indian economy.

    Global financial crisis in 2007-08 was a turning point

    • China responded with high domestic investment: China responded to the crisis by increasing domestic investment, a large part of which coming from its public sector.
    • India restrained its expenditures: In India, the government restrained its expenditures, worrying about the rising fiscal deficits. As public expenditures nosedived, private investors lost confidence as well. Investment as a proportion of GDP was on a steady downward slide

    Invest

    Investing in people is an investment in the future

    • Expenditure on social sector: Public expenditures on the social sectors constitute an investment for the future more so for a country with a predominantly young population.
    • For instance: The income a destitute mother receives for work through MGNREGA may ensure that her children do not have to go to school with empty stomachs.
    • Underinvestment in education: Underinvestment in education and health will undercut India’s chances in a global economy that is increasingly dominated by knowledge. Millions of young people are denied access to affordable education and decent jobs, leading to frustration.
    • For instance: In 2022, only 2.6% of the nearly 1.9 million candidates who wrote the NEET managed to secure a seat for MBBS in a government college.
    • Government expenditure to boost to supply and demand: Government expenditure on health and education can provide a boost to both the supply and the demand fronts in a knowledge-driven economy, more new jobs as teachers and doctors, especially for women, and a greater supply of younger professionals and skilled workers.

    Importance of social sector spending for long-term growth and social welfare

    • Contrasting Capital Expenditures with Social Sector Spending: Unlike capital expenditures, which are generally considered productive, subsidies and social sector spending are often labeled as wasteful. It is commonly believed that cutting social sector spending will not harm economic growth; however, this perception is incorrect.
    • The Negative Impact of Reducing Social Sector Spending: Cutting social sector spending not only exacerbates existing social inequalities but also dampens the prospects for long-term growth.
    • For instance: In India, for example, only 9.8% of workers have access to regular jobs that provide some form of social security. Therefore, measures such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the free provision of food have been a lifeline for millions of poor Indians who have been affected by the COVID-19 pandemic and joblessness.

    Unwarranted fears about fiscal deficit

    • The Counterproductive Nature of Inflated Fears: Inflated fears about the fiscal deficit and government debt will only be counterproductive in a country possessing vast reserves of untapped human and other resources as India does.
    • India’s government debt is held largely by domestic financial institutions does not pose threat: Only a small portion of India’s public debt is owed to external agencies (amounting to 4.2% of GDP in 2022), which does not pose a threat. India’s public debt is held largely by domestic financial institutions, including public sector banks, insurance companies. This is a debt the government owes to the people of this country, whose savings the financial institutions have mobilised.
    • For example: Greece and the most recent example of Sri Lanka’s economic crisis was a result of external debt.
    • A Virtuous Cycle of Debt: Higher levels of development and incomes will lead to the creation of fresh savings, which can help pay off the debts. Borrowing to feed and educate all of its young citizens will provide asset-poor and socially disadvantaged households the opportunity to pick up qualifications required to enter the new job market.

    Invest

    Conclusion

    • For a generation of young Indians, this is, without a doubt, a ‘make or break moment’. without increased public spending on human capabilities, there is little hope for them to escape poverty, lack of skills, and discontent. However, if the government invests in food security, health, and education, India’s young people can thrive and become bright stars that illuminate the world.

    Mains question

    Q. Without increased public spending on human capabilities, there is little hope for young Indians to escape poverty and discontent. Discuss.

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  • R&D Expenditure And The Perils of Inadequate Data

    Central Idea

    • India’s research and development (R&D) expenditure-GDP ratio of 0.7% is very low when compared to major economies and is much below the world average of 1.8%. The main reason is the low investment in R&D by the corporate sector.

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    Overview: Spending’s on R&D in India

    • While the corporate sector accounts for about two-thirds of gross domestic expenditure on R&D (GERD) in leading economies, its share in India is just 37%. There is evidence, however, suggesting that India’s GERD data are an underestimate.
    • A 2022 infobrief of the National Science Foundation (NSF) of the United States on Foreign R&D by U.S.-based multinational corporations (MNCs) shows a spend of $9.5 billion (₹649.7 billion) on R&D in India in 2018, which increased to $9.8 billion (₹690.2 billion) in the following year.
    • There are MNCs from other leading countries also spending on R&D in India.
    • But the latest Research and Development Statistics, published by the Department of Science and Technology (DST) in 2020, has provided an estimate of ₹60.9 billion R&D spending in 2017-18 by foreign MNCs, which is only about 10% of what U.S. firms have reported to have spent in India on R&D.

    What is Gross Domestic Expenditure On R&D (GERD)?

    • Gross domestic spending on R&D is defined as the total expenditure (current and capital) on R&D carried out by all resident companies, research institutes, university and government laboratories, etc., in a country.
    • It includes R&D funded from abroad, but excludes domestic funds for R&D performed outside the domestic economy.
    • This indicator is measured in USD constant prices using 2015 base year and Purchasing Power Parities (PPPs) and as percentage of GDP.
    • It is often used as an indicator of a country’s level of innovation and technological progress.

    Issues with the current system

    • NSTMIS compiles GERD data: The National Science and Technology Management Information System (NSTMIS) of the DST is the agency that compiles GERD statistics in India.
    • Challenge is to collect data from private sector: It is easier to gather the information on R&D by the government sector, the higher education sector and public sector enterprises. The challenge lies in collecting data from the private corporate sector.

    There are two key factors that make the official R&D estimates grossly inadequate

    1. The method used for identification of R&D performing firms does not capture all the R&D performing firms.
    • NSTIMS uses DSIR and Prowess to identify R&D units: A study found only 11% of 298 firms receiving foreign investment (2004-16) for R&D were registered with DSIR. Prowess covers only 3.5% of currently active registered enterprises in India. Leading enterprises in new technology areas may not be listed in both databases, such as SigTuple Technologies.
    • The DSIR list may not have many of the actual R&D performers for two reasons: Firms which consider government incentives as not attractive enough or that are sensitive about sharing critical information with the DSIR may not be inclined to register themselves with the DSIR. 2. It may be difficult for R&D firms in services such as software and R&D services to meet the requirement of having separate infrastructure for R&D to distinguish it from their usual business. In fact, many of the R&D performing enterprises in new technology areas may come under the services category.
    1. The survey conducted by the NSTMIS is the key source of R&D statistics of India
    • Data from Secondary sources works only if firms disclose their R&D spending: If firms don’t respond to the survey, data is collected from secondary sources like annual reports and Prowess. Some firms don’t report R&D spending despite their technology activities, patents and innovators. They may not feel obliged to report accurately to Indian regulatory authorities.
    • For instance: A review of the documents submitted to the Ministry of Corporate Affairs (MCA) by some R&D-oriented firms shows that there are firms which do not report any spending on R&D in spite of their declarations that suggest that they are engaged in activities of technology development, adoption and adaptation.

    What is to be done?

    • Short term measure: the NSTMIS should use the patents granted data, both in India and the U.S., in addition to its current method to identify R&D performing enterprises.
    • Mandatory disclosure: Annual R&D estimates can be prepared from mandatory disclosures that the enterprises are required to make to the MCA.
    • Technologies can be employed to ensure compliance and proper reporting: In order to ensure compliance and proper reporting, technologies can be used like in the case of revamped income-tax return forms where various sections are interlinked.
    • Spending data should be made an essential component of ESG: Additionally, proper disclosure of information to regulatory agencies, including R&D spending data, should be made an essential component of the environmental, social and governance (ESG) ranking of enterprises.

    Conclusion

    • Concrete data on R&D spending is crucial as it helps to identify areas needing investment, promotes economic growth, informs policymaking decisions, tracks progress, and evaluates policy effectiveness in promoting innovation and technological development. Transforming India’s R&D statistics to truly reflect the R&D ecosystem calls for short-term and medium-term measures.

  • Budget and the Digital Governance

    Budget

    Context

    • 2023 promises to be a landmark year for technology and digitisation in India. The Union Budget indicates growing prioritisation of these areas. For instance, the Digital India programme has been allotted Rs 4,795.24 crore, the allocation to the Ministry of Electronics and IT has nearly doubled, and there is a 1,000 per cent increase in the funding for the Artificial Intelligence and Digital Intelligence Unit. But something crucial is amiss.

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    What is the issue?

    • Budget has deep discord between pace of the digitisation and legal policy: Many of the initiatives announced with the budget reinforce the deep discord between the pace of digitisation efforts, and the implementation of effective legal frameworks to strengthen privacy and cybersecurity.

    Budget

    What is Anonymised data?

    • Anonymised data includes data that does not contain Personally Identifiable Information (PII) like name, age, phone number, address, etc., or data from which PII has been removed.

    Analysis: Privacy deficit in India

    • New National Data Governance Policy: A new National Data Governance Policy is going to be introduced to enable access to anonymised data. However, several studies have demonstrated the ease with which anonymised data can be reverse-engineered to identify individuals. Current anonymisation techniques are inadequate and do not guarantee privacy protection.
    • For instance: A study in 2019 was able to accurately reidentify 99.98 per cent of Americans in an anonymised dataset, including information held by the US government on more than 11 million people.
    • Shortfall in Draft Digital Data Protection Bill, 2022: The current Draft Digital Data Protection Bill, 2022, falls short and fails to incorporate safeguards from previous rounds of consultations and even earlier iterations of the Bill.
    • For instance: The 2021 draft imposed a penalty for the intentional reidentification of an individual’s anonymized personal information. This provision has been done away with, amplifying concerns around insufficient limitations and safeguards for privacy.
    • No effective legislative safeguards to prevent access to personal information: The budget also proposes privacy-invasive changes to the Income Tax search and seizure provisions in view of the increased use of technology and digitization. IT officials could seek the assistance of experts to access digital devices and encrypted data. Such broad authorizations are bound to increase the scope for arbitrariness and misuse.

    Budget

    What issues need to be addressed for expanding the scope of DigiLocker?

    • The budget proposes expanding the scope of DigiLocker. For this measure to truly serve the objective of “Trust Based Governance”, two issues need to be addressed:
    • Strengthening of the cybersecurity infrastructure: Strengthening of the cybersecurity infrastructure, including implementation of the long-awaited National Cyber Security Strategy, to inspire people’s trust, and potentially avert situations like the one in 2020 where 3.8 crore DigiLocker accounts were compromised.
    • Preventing scope creep of Aadhaar: Prevent the continuing scope creep of Aadhaar, which is increasingly being made mandatory not only to avail services and benefits but also to exercise fundamental rights such as voting. The negative human rights impact of the forced, widespread use of Aadhaar has been well-documented.

    Did you know?

    • DigiLocker, a government-run cloud-based platform for storing, sharing, and verifying documents and certificates, to make it a one-stop solution of reconciliation and updating of identity and addresses with Aadhaar as foundational identity.

    Budget

    Conclusion

    • The World Economic Forum’s Global Cybersecurity Outlook 2023 finds that data privacy and cybersecurity regulations are effective for reducing cyber risks. Many new laws have been assured this year on data protection, telecom, internet governance and cybersecurity. As the country kickstarts its G20 presidency and prepares to be a leader in this space, we would do well to prioritise the development of exemplary, rights-respecting privacy and cybersecurity regimes.

    Mains question

    Q. For the potential of anonymised data to be unleashed without jeopardising people’s privacy, India first needs a robust data protection law. Discuss.

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  • Budget and the Rural Economy

    Budget

    Context

    • Union Finance Minister Nirmala Sitharaman presented the Union Budget 2023-24. Union budgets can be understood in two ways. The first is as a standard accounting exercise of the government’s revenues and expenditures. It is this second aspect that provides insight into the government’s assessment of the challenges facing the economy and ways to overcome them.

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    First aspect: standard accounting exercise of the government’s revenues and expenditures

    • Projections are less reliable: Over the years, this has ceased to be a good metric with governments failing to spend what is announced in the budget. While the practice of off-budget entries is now no longer relevant, even revenue projections are much less reliable.
    • Budget a comprehensive document: However, the budget continues to remain relevant as the most important and perhaps the only comprehensive economic document of the government.

    Second aspect: Government’s assessment of the economic challenges and ways to overcome

    • Premature to conclude: While the fog of the pandemic has disappeared and the associated supply bottlenecks have eased, it is premature to conclude that the economy has fully recovered.
    • Per capita income is low: Per capita incomes in real terms in 2021-22 are still below the 2018-19 levels and the overall growth between 2016-17 and 2021-22 is at its lowest level of 3.7 per cent for any five-year period in the last four decades.

    Budget

    The pandemic effect:

    • Economic slowdown: The fact that the economy was slowing down before the pandemic makes it clear that Covid only exacerbated the already fragile economic situation.
    • Energy towards managing the pandemic: The structural factors that led to the slowdown remain, as in the last three years the government’s efforts were directed towards managing the pandemic.
    • Decline in demand: The most important of these is the decline in demand, both for consumption and investment. Private consumption accounts for almost 60 per cent of the economy and this engine of growth has failed to fire.
    • The distress is far more serious in rural areas: Rural wages have stagnated for almost a decade now. Farmers’ incomes have either declined or, at best, stagnated in the last five years.

    Budget

    Critique: Budget and the rural economy

    • Withdrawal of expenditure: What has been done is the withdrawal of expenditure on almost every head that mattered for rural economic recovery. With spiraling inflation and even the cushion of free foodgrains having been withdrawn, rural areas are likely to face an uncertain situation.
    • The budget for the agricultural sector is lower than the allocation last year: In real terms, the budget has declined by 10 per cent at a time when the agricultural sector is going through its worst crisis. The rise in input costs for both energy and fertilisers is likely to get worse with the withdrawal of the fertiliser subsidy.
    • Declined allocation of cash transfer: Even the nominal cash transfer that was provided as part of the PM-Kisan has seen a decline in allocation. But then, this budget is no different from others in the last five years.
    • Actual investment in agriculture is declined: Public investment in agriculture declined by 0.6 per cent per annum between 2016-17 and 2020-21, the last year for which data is available. This is a period when the agrarian economy has suffered its worst crisis of profitability.
    • Declined budget for non-farm sector: The non-farm sector is now greater in terms of its contribution to the rural economy but has seen a decline in budget allocations.
    • For instance: The budget for the Ministry of Rural Development is 13 per cent lower than the revised expenditure last year. The National Rural Employment Guarantee Scheme (MGNREGA) has seen its budget decline in the revised estimates for 2022-23. This is the lowest amount allocated in the last five years compared to actual expenditure on the scheme.
    • Only Hosing scheme has seen an increase: The only scheme that has seen an increase in allocation is the rural housing scheme, from an actual spending of Rs 48,422 crore in 2022-23 to Rs 54,487 crore.

    Budget

    Supply-side interventions in demand constrained economy

    • Preference for supply-side interventions: The government’s preference for supply-side interventions even when there is excess capacity in a demand-constrained economy. It is this understanding that is reflected in an almost one-third increase in allocation for investment. A bulk of this is in railways and roads a much-needed boost to the infrastructure sector.
    • Private sector needs to accompany: But given the small share of public investment, it is unlikely to be sufficient unless it is accompanied by the private sector increasing its investment. Unfortunately, the private sector neither responding to rising public investment nor tax subsidies, as were given in 2019.
    • Overall impact: This will have a negligible impact on employment and domestic demand given the low employment elasticity of these investments. Regardless, the increase in investments is welcome.

    Conclusion

    • The problem with this budget is not accounting but economic policy. This was the last full budget in which government could undertake serious steps to revive the economy. That required prioritising allocations towards reviving consumption demand, spurring private investment and protecting people from the vulnerabilities of high inflation and a slowing economy.

    Mains Question

    Q. Discuss the impact of pandemic on Indian economy. Highlight governments supply side interventions in demand constrained economy.

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  • Budget and the Urban planning

    Budget

    Context

    • Union Finance Minister Nirmala Sitharaman presented the Union Budget 2023-24. It has been marked by areas of continuity over the past three years. However, we should not overlook the missed opportunities for more fundamental reforms while celebrating continuity.

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    Areas of focus 

    • Some areas like the continued boost in capital expenditure have received wide attention. Others, such as the reform of urban development and planning processes have received less.
    • As India grows, the quality of urbanisation will determine the quality of economic growth, and vice versa.
    • From this perspective, the continued focus on improving urban infrastructure and land-use efficiency is welcome.

    Budget

    Proposals related to urban planning and urbanization

    • Urban planning reforms and efficient land use: Cities will be encouraged to undertake urban planning reforms, adopting practices that use land more efficiently, creating resources for urban infrastructure, making urban land affordable, and improving inclusivity.
    • Infrastructure financing: Cities will be incentivized to ring-fence user charges on infrastructure and undertake property tax governance reforms so that they are creditworthy enough to issue municipal bonds.
    • Infrastructure Development fund for Tier 2 and 3 cities: A fund will be created by using shortfalls in priority sector lending to create infrastructure in Tier 2 and Tier 3 cities. Rs 10,000 crore is the expected amount to be made available for this fund. States will be expected to adopt user charges to access these resources.
    • Improving sewage and waste management: Proposals on improvements in infrastructure for handling sewage and managing waste.

    Budget

    Proposals continued from previous budget

    • The 2021-22 budget focused on providing urban infrastructure public transport, waste management and universal water supply.
    • In 2020-21, the budget, like this year, proposed improvements in sewage treatment and waste management to do away with manual cleaning.
    • It proposed tax concessions to encourage overseas borrowing for specified municipal bonds. In 2019, the government announced, and then formulated a model tenancy law to promote rental housing.

    What more can be done?

    • Shift towards market-oriented reforms in urban planning and development:
    1. States and city administrators have themselves come around to the benefits of market-oriented reforms, obviating some of the necessity for the Centre to champion them. This could be driven by the emergence of cities as engines of growth, the resultant commodification of urban land markets and, therefore, the increasing focus on land-use efficiency.
    2. Greater openness to new ideas of urban planning could also be driven intellectually by changes in the outlooks of professionals in the field urban planners, architects and administrators who are increasingly able to work directly with state and municipal governments.
    • Lack of Political Significance for Urban Governance Reforms:
    1. It could be that while cities are increasingly economically significant, they are not yet significant enough politically for politicians to look at urban governance issues more seriously.
    2. While the 73rd and 74th amendments to the Constitution devolved many powers to local governments, state governments continue to hold most of the aces. This could change rapidly in the future as India transitions from rural to urban.

    Budget

    Conclusion

    • While urban governance systems are improving, India’s cities are still plagued by issues that need fundamental changes. Our building by-laws, restrictions on land use and zoning still create inefficiencies and make our cities unaffordable, dirty and polluted. The government’s steps to increase capacity building and to create expert committees to propose reforms in these areas is commendable. However, the pace of these proposals is inadequate and need to prioritised to meet urban India’s challenges.

  • Budget 2023:Push for Digitisation and Green Growth

    Budget

    Context

    • The Union Budget speech by Finance Minister Nirmala Sitharaman on Wednesday highlighted the government’s continuous efforts to push for digitisation in the country. Also the Finance Minister listed ‘Green Growth’ as one of the seven priorities of her Budget.

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    Budget

    Push for digitisation in the country: key highlights

    • Digital Public Infrastructure for Agriculture: It will be an open source, open standard and interoperable public good. The platform will offer inclusive, farmer-centric solutions through relevant information services for crop planning and health, improved access to farm inputs, credit, and insurance, help for crop estimation, market intelligence, and support for the growth of the agri-tech industry and start-ups.
    • National Digital Library for Children and Adolescents: This will be established for facilitating the availability of quality books in different languages, genres and at different levels. The government will also try to inculcate a culture of reading by collaborating with NGOs, which will provide age-appropriate reading material to everyone.
    • Centres of Excellence for Artificial Intelligence: There is a proposal for setting up three centres of excellence for Artificial Intelligence in top educational institutions. These centres, in partnership with leading players in the industry, will conduct interdisciplinary research and develop cutting-edge applications and scalable problem solutions in the areas of agriculture, health, and sustainable cities.
    • National Data Governance Policy: Government will formulate a data governance policy to enable access to anonymised data for innovation and research by start-ups and academia.
    • 5G Services: A hundred labs will be established in engineering institutions for developing applications using 5G services to realise a new range of opportunities, business models, and employment potential.
    • E-Courts: Government will roll out phase three of the E-Courts project to ensure the efficient administration of justice.
    • Bharat Shared Repository of Inscriptions (Bharat SHRI): A digital epigraphy museum will be established and one lakh ancient inscriptions will be digitised in the first stage.
    • Skill India Digital Platform: The digital ecosystem for skilling will be further expanded by launching a unified Skill India Digital platform for enabling demand-based formal skilling, linking with employers including MSMEs and facilitating access to entrepreneurship schemes.

    Budget

    Elements of the Budget’s Green Growth push

    • Green Hydrogen Mission: The recently launched National Green Hydrogen Mission, with an outlay of Rs 19,700 crores, will facilitate transition of the economy to low carbon intensity, reduce dependence on fossil fuel imports, and make the country assume technology and market leadership in this sunrise sector. India aims to reach a target of an annual production of 5 MMT of green hydrogen by 2030.
    • Energy Transition: The Budget has provided Rs 35,000 crore for priority capital investments towards energy transition and net zero objectives, and energy security by Ministry of Petroleum & Natural Gas.
    • Energy Storage Projects: To steer the economy on the sustainable development path, Battery Energy Storage Systems with capacity of 4,000 MWH will be supported with Viability Gap Funding. A detailed framework for Pumped Storage Projects will also be formulated.
    • Renewable Energy Evacuation: The Inter-state transmission system for evacuation and grid integration of 13 GW renewable energy from Ladakh will be constructed.
    • Green Credit Programme: For encouraging behavioural change, a Green Credit Programme will be notified under the Environment (Protection) Act. This will incentivize environmentally sustainable and responsive actions by companies, individuals and local bodies, and help mobilize additional resources for such activities.
    • PM-PRANAM: A new PM Programme for Restoration, Awareness, Nourishment and Amelioration of Mother Earth will be launched to incentivize States and Union Territories to promote alternative fertilizers and balanced use of chemical fertilizers.
    • GOBARdhan (Galvanizing Organic Bio-Agro Resources Dhan) scheme: 500 new waste to wealth plants under GOBARdhan scheme will be established for promoting circular economy.
    • Bhartiya Prakritik Kheti Bio-Input Resource Centres: Proposal to facilitate over the next three years 1 crore farmers to adopt natural farming. For this, 10,000 Bio-Input Resource Centres will be set-up, creating a national-level distributed micro-fertilizer and pesticide manufacturing network.
    • MISHTI: Mangrove Initiative for Shoreline Habitats & Tangible Incomes, MISHTI, will be taken up for mangrove plantation along the coastline and on salt pan lands, wherever feasible, through convergence between MGNREGS, CAMPA Fund and other sources.
    • Amrit Dharohar: The government will promote their unique conservation values through Amrit Dharohar, a scheme that will be implemented over the next three years to encourage optimal use of wetlands, and enhance bio-diversity, carbon stock, eco-tourism opportunities and income generation for local communities.
    • Coastal Shipping: Coastal shipping will be promoted as the energy efficient and lower cost mode of transport, both for passengers and freight, through PPP mode with viability gap funding.
    • Vehicle Replacement: Replacing old polluting vehicles is an important part of greening our economy. In furtherance of the vehicle scrapping policy states will also be supported in replacing old vehicles and ambulances.

    Budget

    Conclusion

    • The Union Budget presented by Finance Minister Nirmala Sitharaman outlines the government’s push for digitization and green growth in India. Key highlights suggests that the budget lays the foundation for a more digitally connected and environmentally sustainable India.

    Mains question

    Q. Recently Finance Minister Nirmala Sitharaman presented Union Budget 2023. many suggests that the budget lays the foundation for a more digitally connected and environmentally sustainable India. Discuss.

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  • Opportunity to unlock the full Potential of MSMEs

    MSMEs

    Context

    • India overtook the UK as the world’s fifth-largest economy in 2022, and is on track to achieving PM Narendra Modi’s vision of a $5 trillion economy by 2026-27. Despite concerns of a looming global recession, supply disruptions and the Russia-Ukraine war, India has stood out as a bright spot, growing faster than most major emerging markets. The government’s budget for 2023 presents an opportunity to make the Indian MSMEs competitive and self-reliant.

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    MSMEs

    What are MSMEs? How are they defined?

    • Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 which was notified on October 2, 2006, deals with the definition of MSMEs. The MSMED Act, 2006 defines the Micro, Small and Medium Enterprises based on:
    1. The investment in plant and machinery for those engaged in manufacturing or production, processing or preservation of and
    2. The investment in equipment for enterprises engaged in providing or rendering of services.

    MSMEs in India at present

    • The 6.3 crore micro, small and medium enterprises which account for 30 per cent of GDP and employ nearly 11 crore people have demonstrated this spirit of resilience.
    • With sales in several industries across the MSME sector reaching 90 per cent of pre-pandemic levels, India’s small businesses are scripting a turnaround.

    MSMEs

    Union budget 2023: An opportunity to make MSMEs more competitive and self-reliant

    • Streamlining input tax credit for e-commerce suppliers: Currently, suppliers selling on e-commerce platforms need to procure input services like logistics, which are taxed at 18 per cent. This leads to precious working capital getting blocked without any visibility of future realisation, potentially discouraging suppliers from adopting e-marketplaces.
    • Adequate working capital for small businesses: From meeting fixed expenses such as electricity, rent and employee wages to investing in future growth, adequate working capital is a must for small businesses.
    • Lowering GST rates on input services: By lowering GST rates on input services availed by online sellers, the government will not only shore up their finances but also give a leg-up to their digitisation journey. Further, refunds of accumulated input tax credit will improve their cash flow situation.
    • Expedited GST relaxation for small online businesses: There is also a need to expedite GST relaxation for small online businesses. In a landmark move last year, the GST Council announced a relaxation of rules for small businesses looking to go online.
    • GST relaxation measures for small online vendors: Among other measures, mandatory GST registration was waived for small online vendors with a turnover of less than Rs 40 lakh and Rs 20 lakh for goods and services, respectively.
    • Unlocking the potential of MSMEs through Digitization: With just 10 per cent of our MSMEs currently online, expeditious implementation of these new norms is key to unlocking their full potential. Millions of small businesses are waiting in the wings, hoping to reap the benefits of digitisation such as a much bigger addressable market, increased efficiencies and easier access to capital.
    • The National Logistics Policy (NLP) can also be leveraged to make MSMEs competitive: The NLP aims to bring down logistics costs as a percentage of the GDP from 13-14 per cent to 8 per cent, on par with developed nations. While lower costs will encourage more MSMEs to use tech-powered logistics services, they will need support to tap rising e-commerce demand from smaller towns and semi-rural areas.
    • Indian post and railways can be utilized for cost effective last mile delivery: The government could rope in India Post as a tech-enabled last-mile delivery partner that can facilitate cash-on-delivery transactions at competitive prices. Similarly, the unparalleled reach of Indian Railways can be synergised to ship wares to the remotest parts of the country quickly and cost-effectively.

    MSMEs

    Why the MSME sector is important especially for India?

    • Employment: The Indian MSME sector provides maximum opportunities for both self-employment and wage-employment outside the agricultural sector.
    • Help building inclusive and sustainable society: It contributes to building an inclusive and sustainable society in innumerable ways through the creation of non-farm livelihood at low cost, balanced regional development, gender and social balance, environmentally sustainable development, etc.
    • For example: Khadi and Village industries require low per capita investment and employs a large number of women in rural areas.
    • Contribution to GDP: With around 36.1 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities.
    • Exports: It contributes around 45% of the overall exports from India.

    Conclusion

    • With a visionary government charting out the nation’s growth path, it is anticipated that the budget would certainly deliver on the challenges for MSMEs and take us closer to the dream of an Atmanirbhar Bharat.

    Mains question

    Q. Highlight the significance of MSME’s for India. What more efforts can be taken to make MSMEs more competitive and self-reliant?

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  • Rise in government CAPEX pushes investments up by 53%

    capex

    A sharp 61.2% sequential rise in capital expenditure (capex) by the Central and State governments lifted fresh investment plans announced in the third quarter (Q3) of 2022-23 to ₹7.1 lakh crore, even though private sector investments dropped 41% from ₹6.31 lakh crore in Q2 to ₹3.71 lakh crore.

    What is Capital Expenditure (CAPEX)?

    • Capital expenditure refers to investments in upgrading existing or building new physical assets by the government or private businesses.
    • As businesses expand, capex has a multiplier effect on the economy, creating demand and unleashing animal spirits.

    Types of CAPEX

    Many different types of assets can attribute long-term value to a company. Therefore, there are generalized types of purchases that may be considered CAPEX.

    • Buildings may be used for office space, manufacturing of goods, storage of inventory, or other purposes.
    • Land may be used for further development. Accounting treatment may different for land specifically held as a speculative long-term investment.
    • Equipment and machinery may be used to manufacture goods and convert raw materials into final products for sale.
    • Computers or servers may be used to support the operational aspects of a company including the logistics, reporting, and communication of operations. Software may also be treated as CapEx in certain circumstances.
    • Vehicles may be used to transport goods, pick up clients, or used by staff for business purposes.
    • Patents may hold long-term value should the right to own an idea come to fruition through product development.

    Why need CAPEX?

    • Asset creation: Capex is generally made to acquire fixed assets with a useful life of more than one accounting period.
    • Infra upgrade: It may sometimes add value to an asset by incurring upgrading and maintenance expenditures, thereby increasing the shell life of an investment.
    • Business sustainability: CAPEX increases the profit earning capacity of the business in the long term.

    India’s Capital spending

    capex

    • India’s budgets have seen an increase in allocations for the infrastructure segment, essentially roads and railways.
    • In the last Budget, FM announced a big jump in the government’s planned capex.
    • In 2022-23, the government will have a capex spend of ₹7.5 lakh crore (even more if we add grants-in-aid for capital assets including MGNREGA) — a spike of 27% over the estimates for the previous year (2021-22).
    • Also, the government has ambitious plans to exponentially ramp up spending on expressways, logistics parks, metro systems and housing — much of this work will be sourced out to private contractors.

    Challenges of Capital Expenditure

    The following are the challenges faced due to CAPEX –

    • Substantial funds: Normally, huge funds are required for processing a capital expenditure, and the availability of funds may be an issue. Therefore, organizations must wisely make capex decisions.
    • Long term burden on exchequer: The amount of Capex is charged as an expense in more than one accounting period.
    • Irreversible: Once a CAPEX is incurred, the decision cannot be changed easily. Reversing the capex decision may prove to be significantly costlier for any entity.
    • Uncertainty: It becomes difficult to foresight expenses that may occur in the future. CAPEX involves huge costs and results that may be extended to the future. Hence, characterizing the exact decision regarding CAPEX is uncertain, which affects future expenses.
    • Measurement Issue: The cost and benefits of CAPEX are challenging to identify and measure
    • Temporal Spread: Decisions made regarding CAPEX are consistent over a long time, and investments it includes are called long-term investments. These long-term investments create problems in getting the exact discount rates and maintaining their equivalence in the coming period.

    Why India focuses on CAPEX?

    • Demand push: A thrust on capex eases supply-chain bottlenecks and revives demand.
    • Job creation: So, while capex adds to the productive capacities of the economy, boosting long-term growth, it also spurs job creation and consumption.

    Way forward

    • Timely implementation: Emphasis must also be provided on timely implementation of projects within the earmarked outlay by strengthening monitoring, redressal mechanisms and processes for controlling project delays.
    • Project management: The solution lies in optimising project management processes of all the key stakeholders, including implementation agencies, state governments, vendors and others.
    • Ensuring quality control: This would also help in ensuring quality control, which, in turn, will result in capital assets providing benefits over a longer term following the multiplier effect.
    • Revenue saving: The government should also aim to cut down on inefficient revenue expenditure and focus on creating a balanced and stable virtuous cycle, which can have positive knock-on effects over the long term.

     

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