The Union Budget's assumption that international prices of crude will not increase was deeply flawed

India’s economic performance has been among the worst in the world. According to the IMF in 2020, India’s growth was (-)7.96, placing the country at the 150th rank, nearly at the bottom of the line-up of countries. This position reflects the mismanagement of Covid – India’s stimulus package was the weakest among developed and similarly placed countries.

Further, even before Covid, the economy was sliding down from around 8.2% growth in 2016-17 to 4% in 2019-20, the eve of Covid. And even before that in 2016, demonetisation was akin to shooting at the tyres of a speeding car.

The Covid crash was so severe that the recovery in 2020 may appear one of the highest in the world. Data shows that the economy would be barely climbing back to the pre-Covid level of 2019-20. Even this achievement would depend upon the severity of the economic impact of the Omicron wave. Therefore, undoubtedly, the key macro-economic feature is that of stagnation.

Of the key variables of aggregate demand exports and domestic investments seem to have climbed back to the 2019-20 level but this does not include private consumption demand. Many who expected the Union Budget would at least try to fill this demand gap have been deeply disappointed.

The budget estimate of overall expenditure is ₹39.45 lakh crores, which is only 4.6% higher than the revised estimate for the previous year. If one were to consider inflation, there would be a real drop in the government expenditure. The economy is expected to grow 8% - 8.5% in real terms during 2022-23, which implies that government expenditure - GDP ratio would take a dip during the current year. This is a perverse response to the current economic stagnation and would weaken recovery.

An explanation is that the government has been forced to be prudent because of inflation considerations. This is totally misplaced reasoning as the simple fact is that the present inflation is not because of high demand but on account of cost-push factors. The biggest culprit in pushing up the cost and prices is the increase in prices of petroleum products.

A key premise of the budget calculations is that the international price of crude oil would remain at $70-75 per barrel. But it has already breached $93 per barrel. The increase in retail prices in India is held in check because of the ongoing State elections.

The budget should have rolled back in entirety the additional taxes and cess imposed on petrol and diesel since 2014, when international crude oil prices saw a sharp fall and the argument was that the new taxes would therefore not get reflected in domestic retail prices. The union finance minister does not want to adhere to the same logic when the crude oil price trend has reversed and has now moved up sharply. Therefore, the budget is a recipe for stagflation.

The great expectations of the budget are on capital expenditure and the focus on digital technology. The ‘Effective Capital Expenditure’ is ₹10.68 lakh crore in 2022-23 or about 4.1% of GDP and 27% more than the revised estimate of ₹8.4 lakh crore for the current year, which in turn is nearly 28% higher than 2020-21 allocations.

But these are long gestation projects and would take time before their beneficial impact is felt. Nevertheless, the effort to increase capital expenditure is a welcome turn. China has been a forerunner in infrastructure creation, sustaining higher than 5% investment to GDP ratio for nearly three decades. This has been the main contributor to its international competitive strength.

But the key question is how this capital investment is being financed? In the 2022-23 budget, it has been achieved by squeezing social expenditure. With the overall expenditure remaining virtually the same and escalation in non-developmental revenue expenditure, the development revenue expenditure had to be cut.

This total neglect of the poor and ordinary people is best exemplified by the reduction in the outlay of MGNREGS from the actual expenditure exceeding ₹1 lakh crores in the past two years to ₹73,000 crores. For core schemes for the poor, allocation has been reduced to ₹99,000 crores from the previous year’s revised estimate of ₹1.21 lakh crores. This includes the allocations for SC/ST. The finance minister talked about Narishakti upgrading 2 lakh anganwadies but the allocation is frozen at the revised estimates at ₹20,000 crores.

The allocation for agriculture and allied sectors has increased by merely by 2%. The related major schemes for farmers have seen a budget cut. Allocation of funds for fertiliser subsidy has been reduced by 25%. The allocation for procurement to FCI and the decentralised procurement scheme has been reduced by about 28% at a time when farmers are struggling for a legally guaranteed MSP.

The transfers to the States have come down from 6.91% of GDP in Revised Estimates 2021-22 to 6.25% in 2022-23. Plans are afoot to bypass the States in the implementation of 100% Center Schemes by directly transferring money to the beneficiaries.

The budget which has made no attempt to tax the super-rich and has squeezed the poor on the expenditure side and this is surely going to further widen the obscene level to which inequality has widened during the neoliberal years.

In 1991, the share of top 1% of the households in the national wealth was 16%. By 2020, it had increased to 42.5%. In sharp contrast, the share of the bottom 50% of the households in the national wealth declined from 8.8% to 2.8% during the same period.

Similarly, there has been a dramatic widening of inequality in the distribution of national income also. Given the ‘K’ shaped recovery from the pandemic, inequality has widened to an unbearable level. The recent Oxfam Report has sharply highlighted the differential impact of Covid on the rich and poor. The budget has added to the increasing gap between the rich and poor by ignoring inequality and poverty.

The budget has been described as a vision for the next 25 years. A cartoon captured the tragic-comic situation: The FM and the PM are holding a picture of sweets and goodies before a poor family sitting down to dine. The PM says “It`s all yours… after 25 years”.

(Dr. T.M.Thomas Isaac is the former Finance Minister of Kerala) (Syndicate: The Billion Press)