Union Budget 2022-23: While India Suffers Delhi Twiddles

The PM has commended the Union Budget 2022-23 since it would transform India in the long run. The officials of the Ministry of Finance have repeated this. The Economic Survey 2021-22 had already made clear that the policies being followed during the pandemic are based on `supply side’ which delivers in the long run. It rejected the idea of pursuing demand side policies which would have delivered immediately – the need of the hour. Businessmen and the current President of FICCI, have argued in their favour, even though they usually oppose such policies.

The Politics of Budgets

The FM in the budget speech stated that she is following `supply side’ policies. A budget is a tool of policy and hence it reveals the political bent of the ruling party. This differentiates the budget from the Economic Survey which presents how the economy is performing in the current year and hence is more an economic than a political document.

Some analysts argue that the budget is not important since it is just an account of government’s revenue and expenditures. However, following `supply side’ rather than `demand side’ policies has political implications. Where taxes are to be raised or kept unchanged and what expenditure priorities are proposed also have political implications. So, decisions on these matters reveal the politics guiding the ruling dispensation and therefore, the budget remains important. It guides the economy both for the coming year and the future.

For instance, the reduction in allocation on MGNREGS and increases for modern infrastructure in the Budget 2022 is a political statement because direct employment generation will decline. Similarly, if the government does not increase direct taxes when there is a growing distress and rising disparity with the bottom 60% losing incomes while the top 20% has gained substantial incomes, it is a political choice to help the well-off sections. Continuation of high indirect taxes which are regressive and impact the poor disproportionately is another political choice.

Budget 2022 was presented just before the crucial state assembly elections in 5 states and was expected to provide relief to the vast majority of people badly affected by the pandemic. What was expected was provision of a safety net for those slipping into poverty due to lack of employment, cuts in wages and closure of many units in the unorganized sectors. The World Bank has been proposing Universal Basic Income (UBI) to shore up demand in the economy and this was also mentioned in an earlier Economic Survey. In spite of all this, if the government does not act to check the growing inequity or the distress of the vast majority of the poor people, it indicates a political choice.

The government has been lauded for not doling out `freebies’ to influence elections. Some therefore conclude that the Budget 2022 is guided by economic and not political considerations. But, is the proposal for UBI not guided by economic considerations? Is the government not expected to step in when vast numbers of the citizens face a crisis? After all, in a crisis markets fail and the government needs to step in. That is what was expected during the pandemic and that is what many governments the world over did. So, why is the Indian ruling party not doing so?

Defining `Supply Side’ Economics

`Supply side’ economics does not mean just removing supply bottlenecks, like is the case currently globally and for the Indian economy. Production capacity exists at the pre-pandemic levels but the inputs for production units are in short supply so they are producing less. For instance, the automobile sector is facing a shortage of chips. The result is shortages and inflation. Currently, when many have lost incomes and employment their capacity to buy what they could earlier declines and demand falls. This delays economic recovery.

Indeed, supply bottlenecks need to be eliminated by ensuring revival of those units that that have closed down. The Micro units that were hit hard need working capital to restart operations. But, that is not in evidence. But that is not what `supply side’ economics is all about.

`Supply side’ economics means giving concessions to businesses to increase their profitability in the hope of stimulating investment to boost economic growth and generation of jobs. But, when does this policy deliver and in what time frame? Also, is an increase in profits good enough to stimulate investment?

Nature of Investment

An investment is all about the future. If there is an expectation of increase in demand then businesses will invest more to meet this expected demand. Technically it is called the `accelerator’. Entrepreneurs judge the possibility of an increase in demand on the basis of current sales in relation to their capacity to produce – this is called `capacity utilization’. If a company can produce 100 cars but is selling only 70, it won’t produce 100 cars since its inventory would swell by 30 cars and profitability would fall. If it invests to produce another 10 cars but sales remain at 70, then capacity utilization will fall further and so would its profit (assuming that the price remains unchanged). So, it will not invest more. Actually, when sales are much below capacity, the company may have to lower prices via discounts and then profits will drop further.

Investment does not make sense when capacity utilization is below 80%. During the pandemic capacity utilization fell drastically as demand declined and as per RBI survey it is still below 70% in the organized sector. No estimates are available for the unorganized sectors but it would be even less.

This average hides a split in the economy between those sectors that are doing well and those that are languishing due to lack of mass demand. Technology, pharmaceuticals, telecom, etc., have done well. But, mass consumption items like, textiles and leather goods have revived slowly since the purchasing power of many people has declined. So, in the case of the sectors doing well, the rate of investment rose but overall it has declined.

Structural Shift in the Economy

Further, demand has shifted from the unorganized sectors to the organized sectors since demonetization, wherever the two are in competition. This had the twin effect of growth in the organized sectors but a decline in the unorganized sectors where 94% are employed. When such a large number of workers are impacted, demand falls. Shortage of demand was manifesting itself even before the pandemic. The rate of growth fell quarter after quarter for 8 quarters from 8% to 3.1%, just before the pandemic hit the economy. Capacity utilization was already low and investment in the economy had declined.

Trade is a good example of this shift in demand. E-commerce has gained at the expense of the neighbourhood stores. The pandemic accelerated this trend. Since e-commerce is far more mechanized and automated it employs fewer people than were working in the neighbourhood stores and in the supply chain. No doubt the former provides convenience and eliminates many layers in the supply chain by linking up straight with the producer. This reduces costs. But the issue here is of work and incomes.

In brief, demand is crucial to spur investment but currently it is short. There is a recent example of it. In 2019, the government cut the corporate tax rate to spur investment and especially in new units. This led to a sharp rise in corporate profits but not in investment. The extra profits were largely used to retire the debt of the companies. The economy’s rate of growth continued to fall.

Thus, a pre-requisite for `supply side’ to deliver better economic performance is adequate demand which is presently not the case. Yet, the government is insisting on pursuing the former. This reflects the politics of the ruling party which is to immediately support business profits rather than directly boosting employment and incomes for the workers which will also boost business profits as demand picks up.

Time Frame of `Supply-Side’

At the start of her speech, the FM stated that she is thinking of the long run, “This Budget seeks to lay the foundation and give a blueprint to steer the economy over the Amrit Kaal of the next 25 years – from India at 75 to India at 100.” This is consistent with `supply side’ which if successful delivers in the medium to long term. As argued above, getting more investment takes time, if there is adequate demand.

The time lag is due to the nature of investment. Based on perception, entrepreneurs may decide to invest. Then only plant and machinery maybe ordered. After that, it takes time for these to be produced and finally delivered. It is then that the capital stock of the firm rises and investment can be said to take place. It is not instantaneous that when profits increase, new investment will come on line. That is why `supply side’ policies if they at all deliver, can do so after a while. So, they cannot mitigate the immediate crisis facing the economy.

If the short run is not taken care of can the long term policy goals be achieved? Indeed not since a long term can be thought to be a sequence of short runs. If the latter are not structured properly then the long term goals will also not be achieved. For instance, if demand does not pick up in the short run, decisions for fresh investments will not be pick up so that investment rate will not rise and the goal of boosting long term growth rate of the economy will remain a mirage.

What does the Budget have for the short run?

Not only those in the unorganized sectors have lost employment and incomes the organized sector is also impacted, especially the contact services like, hospitality and travel. The farmers have been protesting about loss of incomes in spite of increased production because they do not get a remunerative price.

Consequently, according to the survey by PRICE, poverty and inequality have both increased. This is causing social discontent to grow all around. Farmers protested for a year and youth is complaining about lack of jobs. Many complain that their work is not commensurate with their skill and training.

One budget cannot solve all the problems but it can indicate the direction that policy will take in resolving the current difficulties. As argued above, `supply side’ policies are not the solution of the current problems, either in the immediate or the long run.

Due to shortage of demand if the private sector will not step up, the onus of giving a boost to the economy is on the government. It has to increase expenditures and give money in the hands of the marginalized sections. But this is not in evidence.

The total expenditure planned in the budget is slated to rise by 4.6%. The rate of inflation is expected to be above 5.5% given the global trends of rising prices. Thus, in real terms the budgeted expenditure will be less than what is being spent currently. Expenditure as a per cent of GDP is also set to fall from 16.25% to 15.3%. Thus, the urgency to boost the economy is not being displayed by policy makers.

Capital expenditures are slated to rise by 35% over what was planned for 2021-22. But its composition is such that it will not give the required boost to employment. Most of the expenditures are slated to be in the capital intensive construction like, roads and railways under the PM GatiShakti programme. In contrast, the labour intensive sector expenditures are being curtailed in real terms. Like on MGNREGS, Health, Agriculture and allied activities and Rural development. Thus, the employment generation resulting from the budget will be negligible.

The substantial cuts in the food subsidy from Rs.2.86 lakh crore to Rs.2.07 lakh crore also implies that the support to the poor will be less. The poor will then have less purchasing power to buy non-food items and demand for industry will slacken further.

So, the budgetary provisions will not boost current consumption. Consequently, capacity utilization will not rise and investment by the private sector will stagnate. Since government investment is only about 10% of the total investment, the increase in government investment cannot compensate for the decline in the private investment. Clearly, the expected stimulus to the economy will not materialize.

Conclusion

So, it is consumption demand that is crucial at this stage but the budget 2022 is not going to boost that. Thus, the crisis in the economy will persist because the budget is focused on the long run and not the short run. As argued, if the short run is not set right then the long run goals will also not be achieved. The politics of `supply side’ which caters to business interests and not the suffering marginalized can only deepen the crisis in the economy. As is said, when Rome was burning Nero fiddled and so are our rulers.