Spur spending for buoyancy in economy

Constructing infrastructure and running it require mostly trained hands and thus jobs are created. But the key reality is that most of these jobs take some time to come. There is a gap between spending and the jobs getting created. And just as the economy cannot grow without infrastructure, in order to run at some kind of capacity, that infrastructure needs the rest of the economy to meet its own demand.

Slowdown: Disruptions due to Covid-19 have seen loss of jobs and closing of businesses, making people refrain from spending. PTI

Subir Roy

Senior economic analyst

The defining feature of the Union Budget for 2022-23 is the government’s emphasis on public investment and within that its Gati Shakti master plan which seeks to transform multimodal connectivity and logistics efficiency by giving a boost to roads, railways, airports, ports, waterways and more.

Infrastructure is the backbone of an economy and without adequate infrastructure in place, it cannot grow beyond a point. A key part of this infrastructure is all the stuff on the ground to facilitate smooth logistics. For example, there is no point in doing great with industrial production if there is not enough capacity on the roads and railways to ship out that production.

Constructing that infrastructure and running it both require mostly trained hands and thus jobs are created. But the key reality is that most of these jobs take some time to come. There is a gap between the spending and the jobs getting created. And just as the economy cannot grow without infrastructure, in order to run at some kind of capacity, that infrastructure needs the rest of the economy to meet its own demand. To use our earlier example, the roads and railways need goods to carry, thus utilising their capacity, in order to lead a meaningful existence.

The overwhelming current Indian reality is an economy severely mauled by two years of rampaging Covid-19 and only recently appearing to overcome that disruption and resume growth. Initially, small and medium businesses were severely damaged and many closed down, thus throwing out of work a large number of unskilled and semi-skilled workers. Without incomes, they could not spend, thus depriving the economy of a major share of its spending.

As this was happening, the large companies making up the corporate sector were less affected. Then as recovery began to gain momentum, the corporate sector was among the first to get back to full or near full capacity utilisation. Their owners and senior executives who barely suffered from any loss of income, which included income from financial investments, in fact managed to emerge from Covid-19 unscathed.

According to two experts with the consultancy Bain & Company, the slowdown in personal consumption expenditure by the low and low middle income households is the single biggest problem facing the economy. The situation has been worsened by income growth being concentrated among the topmost income earners. The poor, for their part, being without jobs and income have dipped into their savings, saying goodbye to any kind of discretionary spending.

All eyes were on the budget looking for measures to revive consumption among the low and low middle income households. But unfortunately, the budget does not appear to have done much in this regard. Getting into specifics, the analysis noted the absence of increase in the rural jobs scheme MGNREGS spending despite an increase in rural unemployment.

The rise in MSP will help agricultural household incomes, but there is no fix for rural unemployment. No rise in subsidies and cash transfers was announced. Equally absent were any cuts in personal income tax. All this, along with persistence in inflation will continue to dampen consumption growth, denying the economy an impetus for overall growth.

It is not as if the budget did absolutely nothing. A sharp increase in production linked investment will create jobs for semi-skilled and skilled workers but it won’t impact medium term consumption spending. Several measures to support and rejuvenate small enterprises have been announced. This will increase consumption by their workers and owners in sectors like travel and retail. Among the positives is a boost to low income housing.

But the overall picture is that there is little in the budget to address the immediate distress that is playing havoc with consumption among the low and low middle income sections which account for 66 per cent of all consumption. The authors conclude that the budget, it was hoped, would revive consumption through employment, income generation or straightforward cash transfers. But it fell short of addressing this critical need.

Taking all the measures in the budget into account, Pronab Sen, former chief statistician of India, feels it will accentuate the K-shaped recovery that is on. In particular, he focused on the Rs 2 lakh crore government capital expenditure announced in the budget. As some of it may be used to bring under the budget the earlier off budget expenditure, actual expenditure increase may not be of the same magnitude.

Along with the rise in capital expenditure, the budget indicated a fall in revenue expenditure. This will likely lead to a fall in Central contribution to state-run schemes. As for the credit guarantee schemes and new loans for small and medium enterprises, these can be availed only by units which still have their heads above the water. A move to help revive moribund units is missing. The credit guarantee for employment intensive travel, trade, hotels and communication sectors similarly will remain in limbo. Credit will be taken by units only when they see demand reviving and people will not go out to restaurants or travel during holidays until they have some disposable income in their hands again.

An idea of the flavour of the budget can be had from the way the allocations for important ministries have changed in the estimates for the coming year compared to the revived estimates for the current year. The communications ministry sees a massive 93 per cent jump but that is on account of capital infusion into the BSNL. Road transport gets a substantial 51 per cent hike on account of Gati Shakti. Jal Shakti comes next with a 25 per cent hike.

As for specific schemes, the gainers are Gram Sadak Yojana (37 per cent), rural drinking water mission (33 per cent), the national education mission 28 per cent), and the national livelihoods mission (14 per cent). As against these, the chief loser is the employment guarantee programme MGNREGS, down 26 per cent. Perhaps the most dramatic is the allocation of a mere Rs 5,000 crore for vaccines, compared to a revised estimate of Rs 39,000 crore.

The ministries which have seen their allocation cut is led by consumer affairs, food and public distribution at minus 25 per cent, on account of a cut in food and fertiliser subsidies. In fact, the total subsidy bill is set to go down by 27 per cent. And last but not the least, rural development is seeing an 11 per cent cut in allocation.