Subject: Economics

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.

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.

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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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.

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.

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.

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.