There are two views about the annual Union Budget. One says it is inconsequential, since nothing much can be done in a budget. Most expenditures are committed, leaving little freedom for policy change. The other view is that it is the single largest item in the economic calendar and has a substantial impact. Since it is the largest item, whether there is continuity or change, its impacts the economy either way.
Most analysts giving opinion on the budget are spokespersons for some business or the other. They take a narrow view of it. Namely, whether their business would benefit or not. Seldom do they take a wider view of the economy and analyse the impact of the budget provisions on the economy as a whole and on the big issues confronting the country. This view by definition is a macro view. It does not balance out various urgent and long-term requirements.
The macro view can help the country focus on major current issues like unemployment, price rise, poverty, inequality, investment, trade and nature of growth. These impact all economic activity, not just specific businesses. If the former is buoyant, so will the latter. This is a positive-sum game where everyone together benefits and India becomes a developed nation. In a zero-sum game, some benefit at the expense of the others.
Since demonetisation in 2016, the organised sector has grown at the expense of the unorganised one, which employs 94 percent of the workforce, in a zero-sum game. It is the cause of rising unemployment and inequality in the country, with consequent social and political strife and instability. Do we need to learn from the current happenings in the neighbourhood?
A budget is not meant only for the year for which it is prepared. It can set the direction of the economy for subsequent years also. Thus, it must be viewed from the standpoint of the next few years, if not the long term. Further, most major problems plaguing an economy cannot be resolved within the span of a year. For instance, unemployment, poverty, inequality, better education and health cannot be taken care of in one year. Only a roadmap can be drawn for addressing these challenges.
Generating jobs
Unemployment is the most critical issue facing the nation. This was also in evidence during the recently concluded elections, especially for the educated youth. Thus, the Budget needs to move towards creating work on a large scale. This is only possible if the unorganised sector regains its dynamism that was dented since demonetisation. It faced three more shocks subsequently in quick succession—a faulty GST, the non-banking financial crisis and the pandemic. The government’s promotion of the organised sector and digitisation further impacted it.
The budget needs to reprioritise from its focus on capital-intensive to labour-intensive areas. Capital expenditures presently are focused on infrastructure like highways, railroads and power. While earlier, these projects used to offer a lot of direct employment, now they do not since they are highly mechanised with use of big tractors, bulldozers and cranes.
Substantial employment could be generated if allocations to education, health, rural development, MGNREGA etc are raised significantly. Unfortunately, these heads have faced budget cuts not only in real terms but nominal terms as well. According to reports, MGNREGA is hardly offering 50 days of work on average, while 100 days should be made available for a family desirous of taking on such work. Not that infrastructure is not needed, a reprioritisation of budgetary expenditures is required.
Boosting farm income, micro units
The unorganised sector consists of agriculture, and small and micro sectors. At a rough estimate, there are 11 crore farmers and 6 crore micro units. They offer a bulk of the 94 percent employment in the unorganised sector. If these sectors are boosted, employment would dramatically rise and family poverty would decline as more working hands in the family would earn an income. Inequality too would decline.
Currently, due to unemployment and low incomes in the unorganised sectors, there is a shortage of purchasing power and that slows down the economy. This was the case even before the pandemic, when the rate of growth dropped from 8 percent in Q4 2017-18 to 3.1 percent in Q4 2019-20, just before the pandemic. The capacity utilisation of the organised sector has been hovering between 70 percent and 75 percent as per RBI data. This is not conducive to private investment.
Refocusing towards the unorganised sector would benefit the organised sector, even if it does not get the concessions it is demanding. As demand picks up, it would invest more. It has the capital to do so. Investments are being held back due to inadequacy of demand. Thus, boosting demand from the unorganised sector would be a win-win situation.
Reprioritising taxes
Taxation reform is crucial for reprioritisation. GST is an indirect tax that is stagflationary. Its reform, as suggested by this author, is urgent. That would help check inflation and benefit the unorganised sector.
The decline in revenues has to be made up via direct taxes. Checking the black economy would get the government substantial resources. For this, changes in corporate taxation would be required. Taxation of wealth and inheritance would be important to not only raise resources from the top 3 percent of the population but for reducing inequality.
Checking cronyism rather than tax concessions for businesses would boost the business environment more effectively and lead to increased investment. Checking black economy would lead to better governance and achieving policy goals. The direct tax GDP ratio needs to rise from its current level of around 6.2 percent to 12 percent
The challenges for the coming years are all macro—employment, poverty, inequality, prices and environmental sustainability. The ground for these needs to be laid in the Union Budget 2024-25 through a holistic perspective that will iron out contradictions among policies. To achieve the goals, a reprioritisation is needed.
(Views are personal)
Arun Kumar | Former professor of economics, JNU and author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead