Analyzing the Union Budget 2023-24 to Unravel its Underlying Strategy | Arun Kumar

Introduction

Any budget is complex consisting of many things of varying importance. Often, people focus on things of their direct interest but miss the wider implications that affect them indirectly and may undo any benefit they may get directly. Thus, it is not only important to look at the trees but also the forest. So, it is important to analyse the Macroeconomic strategy of the budget.

Further, the budget is based on three things. First, analysis of the current economic situation, second, the scenario likely to prevail in the coming year and finally, what direction policy makers may want to give to the economy. It also needs to be kept in mind that there are lags. Announcements do not mean that what is being said will immediately happen. Even after implementation begins, it takes time for the results to follow. But it is always possible that the expected results may not follow due to a variety of reasons.

Thus, a budget needs to be analysed both for its short term and long term impact. Any contradictions between the short and the long term policies leads to their failure. For the county the long term is critical but politically the ruling party may find the short terms gains more compelling. This article attempted to present an analysis of the Union Budget 2023-24 with these features in mind.

Current Economic Challenges

There are internal and external challenges facing the economy. Externally, the ongoing war in Ukraine and the `New Cold War’ are adding to India’s problems. Nothing much can be done with regard to these except making the economy more resilient. A stronger economy will be able to better deal with the external challenges.

The internal challenges are due to the nature of economic growth in India. It is skewed in favour of the organized sectors which employs only 6% of the workforce. As a result, the unorganized sector, consisting of agriculture and the small and the micro sectors is on the decline and leading to high unemployment, especially for the women and youth and rising inequity. The result is persisting poverty and shortage of demand for mass consumption which then causes the rate of growth to remain low or negative.

Government’s claim of a high rate of growth, even that the Indian economy is the fastest growing large economy in the world, is based on the erroneous assumption that the unorganized sector can be proxied by the organized sector. This is patently incorrect since the former is declining by all accounts while the latter is growing at its expense. Thus, the big challenge before the economy is the unorganized sector’s decline.

Inflation has been at elevated levels for most of 2022-23 and has moderated only in the last few months. It is a result of supply constraints and fiscal policies not due to excess demand which monetary policy can tackle. Even when inflation moderates, prices continue to rise and impact the unorganized sectors so that their demand gets impacted and slows the economy. Balance of payment difficulties pose another challenge with high current account deficits leading to a decline in reserves and decline in the value of the Rupee.

Revenues increased 16.1% over the previous year due to high buoyancy in GST, Income Tax and Corporation Tax and yet the Fiscal Deficit did not decline. This is due to the rise in expenditures under certain heads.

In brief, there have been major macroeconomic challenges during 2022-23 and these are likely to persist in 2023-24 given the uncertain global environment.

Ruling Party’s Strategy

The FM’s Budget speech spells out the thrust of the Union Budget. In its Part A, something is offered to every section of society. This is evident from PM’s statement after the presentation of the Budget. Its optics is, balanced, inclusive and caring. Schemes have been announced for all the marginalized sections – the farmers, women, dalits, tribals, workers, senior citizens, MSME and so on. If everything announced by the FMs since Independence is aggregated, no problems should have existed by now. Instead, problems are not only persisting but mounting, especially for the marginalized sections.

The persistence of the basic economic problems is the result of the low priority accorded to the schemes that could alleviate them. In turn, that is because the focus of the ruling party is to cater to the interest of its financiers and this does not become apparent up front. So, what are the interests of the ruling party needs to be understood? The announcements in Part A of the speech camouflage the real intent by making policy appear compassionate to the poor.

Behind the façade of pro poor schemes, the government has been pursuing `supply side’ policies, favouring businesses. Up front, the marginalized sections have been given free food, cooking gas, cash (to the farmers) and so on. These immediate gains have created a caring image. For the marginalized the long term loss of income which has been much more than the immediate gains appears to be theoretical. Their focus is the handouts to mitigate their distress. Politically, this strategy has succeeded in demonstrating the ruling party’s concern for the marginalized.

But these policies can neither deliver growth nor equity since rising inequity has led to demand shortage. Growth had already dipped pre-pandemic because low capacity utilization (73%) led to a low rate of investment. The supply side policies had delivered a huge cut in corporation tax which handed the corporate sector about Rs.1.6 lakh crore of extra profits. But due to shortage in demand, the additional funds rather than being invested were used to retire debt. Clearly, supply side policies can only deliver if demand is adequate.

This contradiction in policies has persisted since they are based on supply side while the need is to pursue demand side policies. As per the RBI data, consumer confidence is at around 85 while the capacity utilization is at 72%. It needs to be remembered that these data are from the organized sector. If the unorganized sector is taken into account the situation would be worse and the rate of growth of the economy less than officially stated. The Union Budget 2023-24 persists with the ruling party’s pro-business policy.

Marginalized Losing Out

The marginalized sections belong to the unorganised sector which employs 94% of the labour force. They have been hit hard by government’s policies. First demonetization in November 2016 then the structurally faulty GST in 2017, NBFC crisis in 2018, forced digitization and attempts to formalize and finally the sudden lockdown in 2020. All these policies have been a part of the design to strengthen the organized sector businesses.

The decline in the unorganized sector has led to their losing lakhs of crores of incomes every year since 2016. This is a multiple of what the government has given them under various schemes. Consequently, they live at the margins of survival as was evident during the pandemic. These people have now become permanently dependent on government support. The ruling dispensation constantly reminds them of what it gives them so as to make them feel politically obliged and to permanently draw them into the ruling party’s fold.

Cuts in Schemes for the Marginalized

The Union Budget 2023-24 demonstrates the further marginalization of the marginals. Subsidy on food is cut from Rs.2,87,194 crore in 2022-23 to Rs.1,97,350 crore for 2023-24. This is being done in spite of persisting poverty as signified by the government’s offer free food to 80 crore poor. The cut in food subsidy will mean that the poor will have to buy more food from the market at the current high foodgrain prices lead to greater poverty. Fertilizer subsidy is cut from Rs.2,25,220 crore in 2022-23 to Rs.1,75,100 crore in 2023-24. The farmers who constitute a large chunk of the poor will lose as fertilizer prices rise and their cost of cultivation increases. An average farmer earns Rs.27 per day from farming which is below poverty line income.

Education and health, key items in the multi-dimensional poverty index, have seen cuts. Expenditure on these heads are less than what was announced in the budget in 2022 (Education at 3.9% and Health at 10.6%) as shown in the revised estimates. This is not unusual. Government takes credit for higher allocations but spends less during the year. India is far from the goal of spending 6% of GDP on public education and 3% of GDP on public health. The planned expenditures on these heads in 2023-24 increase (Education at 8.7% and Health at 2.8%) by less than the nominal rise in GDP so that their share in GDP will fall further rather than increasing.

The National Education Mission was allotted Rs.39,553 crore for 2022-23 but expenditure is slated to be Rs.32,612 crore. Allocation to it for 2023-24 is Rs.38,953 crore, i.e., less than in 2022-23. National Health Mission was allotted Rs.37,160 crore but expenditure is to be Rs.33,708 crore and what is allotted for 2023-24 is Rs. 36,785 crore - less than last year’s. So, in real terms they will be down by about 6% each.

Rural areas lacking in infrastructure and having far lower incomes than in urban areas required a sharp step up in expenditures. The expenditure in 2022-23 is expected to be Rs.2,43,317 crore and the allocation for it for 2023-24 is Rs.2,38,204 crore – a reduction of 2% and adjusted for inflation it would be 7% less. Of the total budget, allocation is 5% while the rural population is about 70% of the total. This portrays the marginalization of rural areas

Employment Generation will Decline

The biggest problem facing the nation is unemployment. What is being done on that front?

MGNREGS, the rural employment generation scheme is being allotted Rs.60,000 crore for 2023-24 which is 49% less than the expenditure of Rs.89,400 crore in 2022-23. It is said that the scheme is demand driven and more would be allotted if the demand is higher. Data shows that only 45 to 55 days of work on an average has been available under this scheme due to shortage of funds. If less is allotted, needy people will continue to be denied work. One person from each family needing work should get up to 100 days of work. Lack of adequate work results in hardship and continuing poverty

Officially the justification is also that allocation to Pradhan Mantri Awas Yojna (PMAY) is being increased sharply from Rs.48,000 crore in 2022-23 to Rs.79,590 crore (66.67% increase). It is argued that a lot of work would be available in rural areas and demand for work under MGNREGS would decline. But, in 2021-22 the expenditure was Rs.90,020 crore which was cut to Rs.48,000 crore in 2022-23 but actual expenditure is to be sharply higher at Rs77,130 crore. So, for 2023-24, it is being raised by 3.2% to Rs.79,590 crore. Adjusted for inflation, it is less than last year’s real expenditure. Thus, this scheme will generate less work than in 2022-23 and demand under MGNREGS would be more than in 2022-23. Thus, the argument is incorrect and MGNREGS should not have been cut.

It is also argued that capital expenditure is being sharply increased - from Rs.7.5 lakh crore to Rs.10 lakh crore and this would generate a lot of work. But most of these allocations are for capital intensive organized sector projects – highways, rail corridors and power - which generate few direct jobs. So, this will not be able to compensate for the decline in work under MGNREGS or due to cuts in education, health and rural development

There seems to be a design in all this. Cuts in MGNREGS and rural development will force labour to migrate from rural areas to the cities so that wages fall and cheap labour becomes available to industry and urban elites. Poverty and unemployment in rural areas helps this migration. The migrants act as the reserve army of labour to reduce labours’ bargaining power.

Taxation and Fiscal Prudence

Tax collections have been buoyant in 2022-23. GST, Income Tax and Corporation tax collections have been much higher than the target. All these taxes are paid by the organized sector and not the unorganized sector. So, their sharp rise reflects the performance of the organized sector. Data shows that this is at the expense of the unorganized sector which is in decline. This is the crisis in the economy.

Concession in taxation has been announced for income tax payees and will accrue to the well-off. Effective income tax payers are about 1.5 crore and they will be the real beneficiaries. But, they did not need more concessions. They were already gaining due to the rapid rise in incomes in the organized sector and the increase in the prices in the stock markets. The middle class pays little of direct taxes and will hardly gain from these tax cuts. Through its consumption, it pays more of indirect taxes than direct taxes. The unorganized sector pays indirect taxes and needed cut there, that would have benefited both the middle classes and the marginalized.

Much is being made of fiscal prudence by sticking to the fiscal deficit target of 6.4% in 2022-23.

However, the more important deficit is the Revenue Deficit which is higher at 4.1% compared to the target of 3.8%. So, the fiscal deficit target is achieved by having higher capital account surplus by borrowing Rs.1 lakh crore more and under achieving the capital account expenditure by Rs.25,000 crore. This is not a good way of maintaining the Fiscal deficit at the targeted level.

Boost to the Economy?

Currently, when demand is short, the real issue is not the size of the fiscal deficit. It helps stimulate the economy. Given the shortage of investment by the private sector, a higher deficit and borrowing programme of the government does not crowd out private investment. Even though bank lending has gone up of late, banks have surplus liquidity for the last two years. So, private sector borrowing will not be impacted by higher public sector borrowing.

The size of the budget as a per cent of the GDP is another indication of whether the economy will get a boost from the budget. It is sought to be raised by 7.1% in 2023-24 while the GDP in nominal terms is taken to rise by 10.5%. In other words, as a share of GDP it is slated to fall and not rise thus, reducing the overall boost to the economy from public spending.

It is the primary deficit that leads to additional demand in the economy and a higher fiscal deficit leads to its enlargement. The primary deficit is sought to be reduced from 3% of GDP in 2022-23 to 2.3% in 2023-24. Even if the deficit is to be reduced, issue is how should it be done?

Fiscal Deficit target can be achieved either by cutting expenditures to the level of revenue collection and/or raising higher revenue to meet the expenditure targets. Both these are in evidence in the budget for 2022-23. Revenues are higher but essential expenditures required by the marginalized have been curtailed, as mentioned above. This reflects the priorities of the government – which expenditures are cut and which are not.

Priorities of the Government

Priorities of the government are reflected in allocations. More so whether they are maintained or cut if the deficit in the budget increases. For instance, in 2022-23, to keep the Fiscal Deficit at the budgeted level of 6.4% of GDP, expenditures on many essential heads have been curtailed. Revised estimates for 2022-23 show cuts in Education, Health, Social Welfare, PM-Kisan, Agriculture and Allied Activities, Transfers to States and Urban Development. These cuts are in spite of revenues rising by 6.8% over the budgeted amount.

However, certain expenditures have been increased. Revised estimates for 2022-23 show increases in two kinds of items. One, in the essentials that had been cut in 2022-23 budget compared to 2021-22 and had to be increased. Two, where allocation is substantially increased in 2022-23 over earlier year’s allocation. Examples of the first kind are, Food and Fertilizer subsidies, Rural Development and Scientific Developments. The second kind heads are Energy, IT and Telecom and Transport. The latter category is what businesses are interested in since they get big contracts to implement schemes in these sectors.

What does all this indicate? First, announcements do not mean that implementation would necessarily follow. This is especially true for items that go to the marginalized sections. Second the heads that are of interest to businesses increase even if the fiscal deficit is rising. Third, expenditure heads that cater to the marginalized get reduced in case the deficit increases. This clarifies the priorities.

The long term strategy of Government of India which is not spelt out anywhere is to promote not only businesses but select big business. This has been at play since 2014. Some businessmen have been enabled to acquire other businesses through actions of government agencies. Further, they have been allotted new infrastructure projects, etc. So, some of the top Indian capitalists have rapidly acquired more wealth than most of the global rich. Their rise is based on cronyism and not innovation as is the case for many of the global rich.

The Rocky Road

Government is trying to copy the Korean strategy of enabling big conglomerates to emerge which can become global behemoths. These Korean entities invested heavily in R&D and Korea promoted education and especially higher education.

Critically, Korea developed in a different environment than the present one. Korea was a bulwark against spread of communism. The West allowed it access to technology and markets. Today, the US is wary of allowing easy access to technology and there is deglobalization which is slowly reducing market access. For success, India has to develop its own technology but that is not in evidence. A big push to education and R&D is required but the budgets for these items have been curtailed, indicating a low priority to them.

Crony capitalism leads to a deterioration of the investment climate. Businesses worry that they could be taken over. No wonder, a large number of rich Indians have been leaving India. This set back in investment is in addition to the decline due to inadequate consumption and shortage of demand. It has also meant that public sector investment has not crowded in private investment.

Adani Imbroglio Brings out the Pitfalls

The ruling party’s strategy consists of two parts. Promote select businesses and maintain the marginalized at a minimum level of existence. Politically, this helps show the masses that the government cares for them. A massive campaign along with high powered advertisement is used to constantly bombard the public. The idea is to permanently draw the marginalized into the ruling party fold.

However, the pitfalls of this overall strategy are being revealed. Limits of cronyism are emerging as the Adani imbroglio unfolds. The share price of companies of this group have collapsed since a Report on the manipulations by this group has come out in end January. This is sullying the business climate. The government’s attempts to get more foreign investment will be stymied.

The manipulations used by the Adani group to grow became apparent in the way the Adani Enterprises FPO got fully subscribed on the last day of the issue, January 31, 2023. No serious investor would buy the shares under FPO at around Rs.3,200/- when the price in the market was around Rs.2,900/-? This price was also artificially raised since on January 27, it was Rs.2,761/- and on February 1, after the FPO closed, it was Rs.2,135/-.

Why would anyone subscribe to the FPO when they could pick up the shares at a lower price in the market? There are two possibilities. There was pressure on those subscribing to buy. And, money of the Adani group itself was round tripped from abroad via shell companies, etc. This illustrates the stratagem adopted by the group to expand at break neck speed in the last few years – use clout where required and bring in funds via round tripping.

Conclusion

The Union Budget 2023-24 is crafted in the framework of the `supply side’ policies to benefit businesses in the organized sector at the expense of the unorganized sector and other businesses. The other part of the strategy is, for political reason, keep the marginalized permanently dependent on government handouts. Consequently, the key challenges facing the economy – slow growth, rising inequity, unemployment and poverty - will persist. So, the strategy underlying the Union Budget 2023-24 is counterproductive and needs overhaul in favour of development from below.

(Author: Arun Kumar is Retd. Prof of Economics, JNU and has written ’Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’. 2020)