Modi government has not learnt from its electoral setbacks

The Budget favours big business over social needs, ignoring opportunities to create jobs through health, education, and welfare spending.

Prime Minister Modi and Finance Minister Nirmala Sitharaman meet economists ahead of the Budget in New Delhi. | Photo Credit: ANI

The hype around the presentation of the Union Budget is often overblown in India, but it still merits attention. Because it provides an indication of the nature and intentions of the Central government, at least for the year going forward, it is both economically and politically significant. What does this year’s full Budget tell us about how the Narendra Modi government in its third term, now operating as a minority government dependent on support from allies, will function and how it proposes to steer the economy?

First, the regime, after years of denial, has finally been forced to admit that unemployment is a problem. But the difficulty is that having ignored it thus far, the government is unprepared and has no real strategy to deal with it. So, the Budget speech had to resort to summarising its goals in ten different phrases to generate the acronym “EMPLOYMENT”, but it had relatively little in terms of real content.

Addressing the concern about stagnant employment generation requires, at the very least, a recognition of its causes. This government is apparently unable or unwilling to undertake that exercise, but the reasons are fairly straightforward.

Employment challenge

Low employment generation has been a longstanding problem of the Indian development experience, but the past decade has been exceptionally bad. Both formal and informal employment has barely increased, and the slight increase in women’s employment recorded recently is largely because of “unpaid helpers in family enterprises”, who are now more than 37 per cent of all recorded women “workers”. Real wages have also stagnated over the past decade for most workers and even declined for around half.

As a result, mass consumption has remained suppressed and the domestic market has not grown, creating a vicious circle that in turn constrains job creation. Inadequate demand is now the binding constraint on investment, which fell from nearly 36 per cent of GDP in 2007-08 to less than 31 per cent in 2023-24. Meanwhile, technological changes mean that large-scale production in the formal sector, of both manufactured goods and new services, will require fewer and more skilled workers.

Micro, small, and medium-sized enterprises (MSMEs) provide the bulk of employment, but they have experienced so many consecutive blows over the past decade—the drastic demonetisation in 2016, a botched GST rollout in 2017, the brutal COVID-19 lockdowns in 2020 and 2021 with almost no compensation—that it is a wonder that any survive at all. Public employment has also stagnated, with huge vacancies and greater reliance on contract and casual workers, including many women “scheme workers” who do not even get minimum wages.

As a result, self-employment dominates the landscape of work. Farming is increasingly unviable, making it unattractive as an occupation, but people remain in agriculture because there are few options outside of it. These are the issues that must be dealt with if the employment problem is to be addressed at all.

But the Budget barely touched on these concerns, and certainly provided next to nothing to alleviate them. Instead, small measures for addressing youth unemployment were proposed as “employment-linked incentive”, mainly for formal sector workers and their employers. Three schemes would provide a small subsidy for a limited period for new recruits in formal sector jobs, payable to the Employees’ Provident Fund Organisation or pension fund. The amounts involved per person are small, and will probably only provide a subsidy for employment that would have occurred anyway. Worse, they are confined to formal sector jobs, which are a tiny fraction of all employment.

The Congress Party has accused the Modi government of imitating its own manifesto for this policy, but whoever did the copying did not read or understand their proposed scheme, since this version lacks both scale and content. In any case, it is likely to do little to address the enormous employment challenge the country faces.

The second unfortunate conclusion we can draw from this Budget is that the Modi government has learnt no lessons from recent electoral setbacks. It will continue with its previous approach in three crucial areas: the fondness for sleight-of-hand tactics to conceal reality; extreme political and economic centralisation; and reliance on elite-favouring trickle-down economics. There is indeed a doubling down on all of these, even though they have been disastrous for the country and no longer bring any political dividends.

Smoke and mirrors approach

Consider the smoke and mirrors approach to the presentation of fiscal data, which are (as usual!) cherry-picked for purpose.  A major focus of the Modi government is infrastructure investment, for which it has been much lauded. While this has certainly increased, the Budget outlays have invariably been overestimates, and actual public investment has been significantly lower.

For Budget 2023-24, the declaration of more than Rs.10 lakh crore for capital investment generated headlines, but actual spending fell short by Rs.52,455 crore. The final capital spending (including grants-in-aid to state governments for capital spending, which were 18 per cent below Budget outlays) fell short by a whopping Rs.1,18,656 crore. This creates obviously scepticism about whether the declared outlay of more than Rs.11 lakh crore in the current Budget will be met.

This underspending matters, for example in the Railways, where the gap last year between declared outlay and actual spending amounted to more than Rs.31,000 crore. This has shown up in overused tracks and lack of basic safety equipment that are the prime causes of recent rail derailments and other accidents.

Many observers had hoped that the recent general elections would force some change in the extreme centralisation that has characterised the Modi government thus far. Unfortunately, this Budget is yet another attack on fiscal federalism, to the point of leading to a boycott of the NITI Aayog meeting by Chief Ministers of states led by Opposition parties. This Central government has centralised both fiscal resources and economic decision-making. It has also been extremely partisan in its dealings, differentially providing more resources to states led by the BJP and allies, and denying resources to others.

This was made more explicit in the current Budget, where two crucial allies providing support to the BJP were rewarded with larger fiscal transfers to their own states, Andhra Pradesh and Bihar. Meanwhile, the Centre continues to divert taxation towards cesses and surcharges that do not have to be shared with state governments. The share of all transfers (including Finance Commission awards and other grants and loans) in total central government spending fell from 22.1 per cent in 2022-23 toas low as 20.7 per cent in 2023-24.

Delhi Chief Minister Arvind Kejriwal, Kerala Chief Minister Pinarayi Vijayan, Punjab Chief Minister Bhagwant Mann, Jammu and Kashmir National Conference President Farooq Abdullah, CPI General Secretary D Raja, CPI(M) General Secretary Sitaram Yechury and others during protest against the Modi government over distribution of central funds to states, at Jantar Mantar, in New Delhi on February 08, 2024. | Photo Credit: SHASHI SHEKHAR KASHYAP

Persisting cronyism

The basic economic approach of this government—of relying on big corporate players, and within those, a few favoured cronies to deliver economic growth—also remains unchanged. This means continuing to subsidise large corporates in various ways and giving them tax breaks while cutting essential social spending that affects the lives of people. Remarkably in a country with such poor nutrition indicators and indications of growing hunger, and after the Supreme Court has rapped the government for excluding at least 80 million people from food entitlement, the Budget allocation for the food subsidy is lower in nominal terms, implying a significant fall in real terms.

The money for the National Social Assistance Programme, which provides pensions, is unchanged from last year, so the ridiculously low amount of Rs 500 per month per pensioner is apparently to continue, with no increase in the number of beneficiaries! Spending on health and family welfare last year fell short of the budgetary outlay by Rs 13,020 crore and was only 0.25 per cent of GDP. The outlay for the current year barely stays above estimated inflation, suggesting that this will decline to an even lower share of GDP. The allocations for the employment programme under the MNREGA have remained at the same level as the current year’s spending, implying a fall in real terms. And of course, there is no consideration of an urban employment guarantee programme at all.

Such low rates of spending on social sectors amount to a huge missed opportunity because these are precisely the sectors that—along with a proper package for MSMEs that goes beyond some adjustments for bank credit—could actually contribute to increasing employment. These are all very employment-intensive activities, and increased public spending in these areas would not only lead to a better quality of life for all citizens but also have large multiplier effects, creating more demand and resulting in employment. The failure to recognise this is of course a major critique of the government’s economic strategy—but it is also very bad news for Indian people.

Jayati Ghosh is a development economist who is currently Professor of Economics at the University of Massachusetts Amherst (US). She taught the subject at Jawaharlal Nehru University, New Delhi, for nearly 35 years.