Applying a political economy lens to the recently announced Budget 2022-23, Yamini Aiyar contends that the emphasis on capital expenditure over welfare in the two Budgets announced during the pandemic are a mere continuation of a shift in political narrative towards “market-friendly reforms” that began with the Modi government’s re-election in 2019.
The 2022-23 Budget offers an opportunity to take a long view on the pandemic effect on the government’s fiscal position and the context that shaped the policy choices made. The headline grabbing number of this Budget – 35% increase in capital expenditure – reflects a clear policy direction, which is growth led by greater public investment in physical infrastructure at the cost of welfare spending. The economic rationale of these choices against the backdrop of the pandemic context – declining GDP (gross domestic product), rising inequality, persistent unemployment – has been widely debated, including in these pages. But these choices also present an important political economy puzzle. Has the government abandoned its welfarist political narrative that dominated the 2019 election? And what are the political drivers behind this choice?
The pandemic effect
As highlighted in my post last year, the central government entered the pandemic in the midst of what Rathin Roy has termed a silent fiscal crisis. This crisis was on account of its consistent failure to achieve revenue targets (net tax revenue in 2019-20 was 1.1% of GDP, short of budgeted estimates for the year) and failure to disinvest. Unsurprisingly, weak revenue raising capacity resulted in a consistent slippage in achieving stated fiscal deficit targets, which the government ‘managed’ by increasing off-budget liabilities.
And then the pandemic hit. Expectedly government expenditure, particularly on subsidies and MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act)1, increased from 13.2% to 17.75% of GDP, even as revenues fell and the fiscal deficit rose to 9.2% of GDP. It is worth noting though that the real hole in the fiscal math came from failed disinvestment! But the pandemic was also an unexpected opportunity for the Ministry of Finance to partially set its fiscal house in order. Fiscal deficits across the globe were on the rise, thanks to pandemic induced largesse. The Indian government while somewhat modest in its fiscal response to the pandemic, used the opportunity to bring its off-budget liabilities, particularly food subsidy related loans of the Food Corporation of India (FCI), back on its books. A one-time payment of Rs. 1.5 lakh crore was made to the National Small Savings Fund to clear the FCI’s outstanding dues. This clean up added approximately 0.7% of GDP to the fiscal deficit.
A year into the pandemic, despite the deadly second wave, the government embarked on the path to fiscal consolidation through expenditure contraction. Despite a modest improvement in tax revenues, government expenditure in the financial year (FY) 2021-22 is set to contract by a whopping 1.5% of GDP compared to the previous FY, while the fiscal deficit is expected to reduce sharply to 6.9% in FY2021-22. Of course, disinvestment targets, which were remarkably ambitious, remained just that – targets! The shortfall is as high as Rs. 1 lakh crore, the air India sale notwithstanding.
It could be argued, as the government has, that GDP was recovering in 2021 and therefore expenditure pressures were low and fiscal consolidation necessary. But the reality is that economic distress has remained acute, visible through elevated demand under MNREGA. And current spending level are simply not enough to respond to ground-level realities. Unmet demand in MNREGA, for instance, remains high. In February 2021, 77 lakh households that had demanded work were yet to receive work (Kapur et al. 2022, Government of India, 2022).
In addition, several critical schemes that provide basic public services – education, nutrition, even the flagship drinking water scheme Jal Jeevan Mission – have delayed or reduced spending this fiscal. One reason for this is that budgeted funds were not made available. Calculations by the Centre for Policy Research’s Accountability Initiative point out that until December 2021, only half of the year’s annual budgetary allocations had been released for these key schemes. The revised estimates for FY2021-22 are thus lower for many of these critical schemes compared with budget expectations at the start of the year – despite modest improvements in revenues.
The policy choice to invest in capital expenditure over revenue expenditure as the path for economic recovery was visible in the 2021-22 Budget as well. In FY2022-23, this shift in priorities has become sharper. Total expenditure is set to contract from 16.24% of GDP to 15.29%. And the infusion into capital expenditure is at the cost of a significant contraction in revenue expenditure.
In sum, the pandemic context and high fiscal deficit numbers notwithstanding, the government has been consistently conservative in its fiscal stance through the pandemic. After the expansion in the first year, the focus has been firmly on fiscal consolidation. Given the repeated failure to raise revenue, particularly through disinvestment, perhaps the only choice available was to embark on the path to consolidation through contraction in expenditure rather than doubling down on raising revenue. This is visible in the fact that revenue targets for FY2022-23 are marginally lower than these revised estimates for FY2021-22, despite hopes of growth and higher than budgeted tax revenues in FY2021-22. Disinvestment targets are even lower, a sober reminder that the government has all but given up on addressing its capacity failures.
Consequently, the only way to make room for the preferred policy instrument of “relying on public capital investment to crowd in private investment” to quote the Finance Minister, is by allowing the axe to fall on welfare expenditure. It is worth noting, however, that spending on capital expenditure is not easy. Nor does it immediately generate jobs. Consider this. In November 2021, only 49.4% of budgeted capital expenditure had been spent. This increased to 70.7% in December, partially on account of Air India liabilities. Those familiar with the realities of large infrastructure projects, will not be surprised. The truth is new infrastructure projects are capital-intensive and slow to start up, despite the promise of a ‘bad bank’ and asset monetisation pipeline. When considered against the backdrop of the ravages of Covid-19 – unemployment, inflation and declining incomes – the choice of prioritising capital expenditure over spending on areas such as MNREGA, education and health that are in urgent need of funds and where employment can be maximised, is both misplaced and callous.
The political economy puzzle
This consistent emphasis on capital expenditure over welfarist announcements through the pandemic raises an important political economy puzzle. Welfare politics was loud and visible in Prime Ministers Modi’s first term in office, particularly after 2017. Ujjwala2, Swachh Bharat3, PM Kisan4, Ayushman Bharat5 – all made their way into budget speeches to loud applause and went on to play an important role in shaping the 2019 election narrative. But this welfarist narrative, while electorally powerful, sat in deep tension with the ‘reformist’ image that Candidate Modi had so carefully crafted with slogans like “maximum governance, minimum government” in the run up to the 2014 campaign.
Since coming back to power in 2019, starting with the decision to cut corporate tax rates in September 2019, a concerted effort has been made to resurrect the reformist image. Recall that at the peak of the national lockdown in May 2020, amidst a remarkably ungenerous direct fiscal stimulus package, the central government announced a slew of so called “market-friendly reforms” like the farm ordinances and changes to labour laws. The complete political failure to implement these notwithstanding the insistence on using the pandemic as an opportunity to introduce “market friendly reforms” can only be interpreted as a significant shift in the political narrative. In fact, even the pre-pandemic Budget of 2020-21, presented amidst a significant economic slowdown, steered clear of a demand stimulus and expenditure on welfare – PM Kisan, Ujjwala, food subsidy – was already contracting. The emphasis on capital expenditure over welfare, in the two Budgets announced during the pandemic, are a mere continuation of this shift that began with the Modi government’s re-election.
It is difficult to offer any definitive assessment of the political drivers behind this shift away from welfarism at least at the policy level. Perhaps the electoral victory of 2019 and the fact that in the years since, the government has doubled down on pursuing its ideological agenda, has opened up the political space for a narrative shift. This was, after all, the primary emphasis in the Prime Minister’s early years in office when “ease of business”, “empowerment over entitlement”, “maximum governance” dominated the political narrative. It was the electoral reversal in Bihar that resulted in a “welfare emphasis”. Arguably with the 2019 victory created the political opportunity to underplay “welfarism”, in favour of “reforms” and “growth” – the “suit-boot sarkar”. This is not to suggest that welfare is no longer critical to the BJP’s (Bharatiya Janata Party) strategy for political mobilisation. Indeed, it remains closely intertwined with the ideological project that continues to form a critical part of the electoral narrative. However, it is likely that the BJP is confident that its welfare credentials, especially at the grassroots are now strong enough, that it can craft a new “double engine” narrative: the now fulfilled promise of welfare for the masses and a new “reformist” image for private capital. Whether this double engine will yield electoral dividends as the country heads toward five crucial state elections is anybody’s guess but the pandemic context and the visible economic distress suggests that the ravages of Covid-19 are likely to deepen in the years to come.
I4I is on Telegram. Please click here (@Ideas4India) to subscribe to our channel for quick updates on our content
- MNREGA offers a guarantee of 100 days of wage-employment in a year to a rural household whose adult members are willing to do unskilled manual work at the prescribed minimum wage.
- Pradhan Mantri Ujjwala Yojana (PMUY) is a centrally sponsored scheme launched by the Ministry of Petroleum & Natural Gas in May 2016 to provide LPG connections to Below Poverty Line (BPL) households.
- The Swachh Bharat Mission is nationwide campaign aimed at eliminating open defecation in rural areas through mass scale behavior change, construction of household-owned, and community-owned toilets, and establishing mechanisms for monitoring toilet construction and usage.
- PM Kisan is a central government scheme with under which an income support of Rs. 6,000per year is given in three equal installments to all landholding farmer families.
- Ayushman Bharat is the central government’s national public health insurance fund which aims to provide free access to health insurance coverage for low-income earners in the country, and roughly, the bottom 50% of the country qualify for this scheme.
- Government of India (2022), ‘Economic Survey 2021-22’, Ministry of Finance.
- Kapur, A, R Kasliwal and JS John (2022), ‘Mahatma Gandhi National Rural Employment Guarantee Scheme (Budget Briefs)’, Accountability Initiative.