Government Budgets

Budget and the Rural Economy


From UPSC perspective, the following things are important :

Prelims level: Budget highlights

Mains level: Budget and the rural economy



  • 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.


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.


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.


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.


  • 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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