Union Budget 2022-23: Government reduces spending on welfare, sticks to conservative fiscal stance

The Narendra Modi government choosing to stick with its regressive fiscal agenda in an election year sends out a clear message: it places all its bets on a communally polarising strategy.

Finance Minister Nirmala Sitharaman with the folder-case containing the Union Budget 2022-23 outside the North Block, in New Delhi, on February 1.

Even in normal times, government budgets are expected to be well-conceived exercises that aim to mobilise additional resources and deploy them in ways that advance immediate objectives without harming longer term growth prospects. Since the resource mobilisation measures impose differential burdens on different sections of the population, and the benefits of spending vary, the exercise is inevitably political. The political considerations that weigh on the government will also differ across time. Thus a combination of expediency and a medium-term agenda are expected to define the fiscal stance of the government.

Implicit in this view of budgets is the idea that the state defines and pursues a clear-cut development agenda. But a consequence of the turn to neoliberalism has been the conversion of the state into an agency that focuses on incentivising private capital and facilitating a growth trajectory that will hopefully be led by the private sector. That renders the Budget an exercise without much substance.

It is this state of affairs that Budget 2022 reflects. The Budget was presented at a significant moment. On the one hand, with some evidence that the intensity of the pandemic is waning and that the vaccination drive has reduced the severity of the disease, the prospects of recouping the economic losses of the last two years and helping those whose livelihoods were damaged by the pandemic and lockdowns seem to be improving.

This calls for fiscal interventions that can facilitate the turnaround. While that is under way, attention can be paid to addressing other pressing problems afflicting the majority of citizens, such as unemployment, underemployment and the awfully low incomes earned in agriculture and the informal sector.

That was an opportunity Budget 2022 let pass. In tone and substance it reflected an absence of intent to do the needful. At the very beginning Finance Minister Nirmala Sitharaman’s speech made clear that the focus of attention, if any, was completely different.

Combining the vernacular with digital slang, she spoke of the government’s “vision” for Amrit Kaal or “the 25-year-long leadup to India@100”. Over this quarter of a century, the objective of the government will be to combine a focus on growth with a focus on “all-inclusive welfare”. Using public investment to facilitate and crowd in private investment, the private sector will be helped to promote a “digital economy and fintech, technology enabled development, energy transition, and climate action”.

This language, besides leaving the listener wanting more clarity, points to an absence of purpose, or at least any sense of urgency to address the crisis afflicting the economy.

The tone is surprising, coming at it does in a mini-election year, with the campaign for crucial elections in a number of States peaking. Yet there seems to be little enthusiasm to use the Central budget as a potential means of swaying voter sentiment in favour of the ruling party. It is as if the government has convinced itself that proactive fiscal policy is not needed even on political, let alone economic, grounds.

In fact, the Budget shows much evidence of the government’s inclination to abjure proactive fiscal policy. While the world over, governments are seeking ways to finance a step up in expenditures, in India spending is on the decline. The total expenditure in 2022-23 in nominal terms is budgeted to rise by just 4.6 per cent relative to the revised estimates for 2021-22, which, when adjusted for inflation, would definitely signal stagnant or even reduced real spending.

Reduced spending on welfare

This incredible feat is sought to be achieved by cutting precisely those expenditures which are crucial for the majority of the people who have been adversely impacted by the pandemic and the government’s response to it. The spike in demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has shown how the scheme was a lifesaver for migrant workers forced to return home. But the declared intent is to slash allocations for the programme. Allocations had risen to Rs.1,11,170 crore in the first pandemic year 2020-21, and then fell to Rs.98,000 crore in 2021-22 as per the revised estimates (RE). They are now projected to fall further to a low of Rs.73,000 crore in 2022-23.

The other intervention that was used to provide some support for those devastated by the pandemic was the Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY) under which an additional five kilograms of grain was provided free of cost, over and above the regular allocations under the public distribution system. The programme was implemented in five phases, the last of which is slated to end in March 2022.

Needless to say, outlays for food subsidies had to be raised to support the programme. Food subsidies rose from Rs.1,15,770 crore in 2019-20 to Rs.5,41,330 crore in 2020-21 because of the need to clear large accumulated arrears due to the Food Corporation of India (FCI) and came down to Rs. 2,86,469 crore in 2021-22 (RE). They are now projected to fall, and are slated to fall sharply to Rs.1,05,222 crore in 2022-23. The government clearly does not plan to continue with the PM-GKAY after March 2022.

Finally, although the pandemic is still ongoing, the demand for grants of the Ministry of Health and Family Welfare shows that total spending (revenue and capital) in this crucial area, which rose marginally from Rs.80,026 crore in 2020-21 to Rs.85,915 crore in 2021-22 (RE) is budgeted to stagnate in normal terms and touch Rs. 86,606 crore in 2022-23.

Together, these reduced allocations suggest that the government seems to have decided that special expenditures to address the COVID-19 crisis are no more required, even though the effects of the pandemic still weigh heavily on large sections of the population.

Along with this limited effort at proactive intervention, the government has even given up on its goal of significantly reducing its fiscal deficit. Having fallen from 9.2 per cent of GDP in 2020-21 to 6.9 per cent in 2021-22, that deficit is expected to remain at 6.4 per cent of GDP in 2022-23, despite optimistic projections of revenue receipts.

One reason is that as compared with the Rs.1,75,000 crore from disinvestment receipts budgeted for in 2021-22, the government seems to have turned at least partly realistic and provided for just Rs.65,000 crore in 2022-23. This is because as compared with budgeted receipts of Rs.1,75,000 crore from asset sales in 2021-22, the revised estimates place the figure at Rs.78,000 crore, reflecting a shortfall of close to Rs.1,00,000 crore. Even this revised estimate may prove difficult to realise by end March.

Finally, the government continues to display an unwillingness to mobilise additional resources to finance much-needed expenditures, let alone roll back the many direct tax concessions granted in recent years, especially the corporate tax concessions of September 2019. The only effort at direct taxation is an impost on gains from crypto trading.

To make up for the strain in resources despite curtailed spending, the Centre has relied hugely on special duties and cesses on petrol and diesel, much of the revenues from which do not have to be shared with the States.

Petrol cess

Receipts from the special excise duty on motor spirit have risen from Rs.79,359 crore in 2020-21 to Rs.92,970 crore in 2021-22 (RE) and is budgeted to touch Rs.95,750 crore in 2022-23. The corresponding figures for a cess on crude oil are Rs.10,894 crore, Rs.17,500 crore and Rs.18,020 crore; for the road and infrastructure cess on petrol and diesel, they are Rs.1,23,596 crore, Rs.2,03,235 and Rs.1,38,450 crore respectively.

Earlier receipts from the cesses on petrol and diesel accrued to the Central Road Fund (CRF) set up to garner resources for national highways, State roads, and such infrastructure. However, in 2018 the CRF was renamed the Central Road and Infrastructure Fund (CRIF) and brought under the Ministry of Finance, allowing these resources to be used for other infrastructure projects. This increased the flexibility with which these resources could be deployed.

These revenues have been crucial to the government’s infrastructure spending push. Much of the expenditure on social infrastructure in the Budget, such as the entire Rs.60,000 crore allocated for the “Har Ghar, Nal Se Jal” programme to reach tap water to individual households, is to be financed with funds from the CRIF. Rs.1,00,100 crore of the proposed investment of Rs.1,34,015 crore by the National Highways Authority of India (NHAI) in 2022-23, or as much as 75 per cent will come from the CRIF.

And Rs.50,000 crore of the Rs.1,37,100 crore of net capital expenditure of the Ministry of Railways is to come from the CRIF. In sum, a huge part of the capital expenditure, which the Finance Minister makes much of, is to be financed with sums mobilised through inflationary taxes on universal intermediates such as petrol and diesel that are directly or indirectly paid for by the common person.

This would directly impact the pace and pattern of growth. Though national income estimates for recent quarters suggest that the India economy is creeping back to pre-pandemic dimensions, private consumption expenditure still remains depressed. Using inflationary taxes on petroleum products in that context will not only raise the rate of inflation but also further compress private consumption. Since government expenditure is simultaneously being held back because of the fiscal stance adopted by the Centre, the aggregate demand would be compressed as well. This would cut short the return to pre-pandemic growth and trigger stagnation. In sum, the Budget paves the way for “stagflation”.

The fact that the government has chosen to stick with this regressive and conservative fiscal stance in an election year sends out a clear message. This government does not see fiscal policy and the Budget as instruments to improve its political fortunes. All bets are being placed on a polarising agenda dressed up as the nationalism suited to a “New India”.

As a result, the government does not care that fiscal interventions can be crucial to support a beleaguered majority of citizens. Hopefully, a polarising agenda, toxic in itself, will prove to be inadequate to neutralise the effect of the callous neglect of economic hardship on popular sentiment, worsened by engineered increases in inequality and sops for a small elite.