Will the bet on capex over welfare pay off?
3 min read . Updated: 08 Feb 2023, 12:58 AM IST
PremiumAfter months of K-shaped recovery and an adverse inflation-wages dynamic in rural India, the budget has been criticized for ignoring key welfare schemes
Avoiding populism despite next year’s elections, the 2023 Union budget promised growth through vigorous capital spending. But after months of K-shaped recovery and an adverse inflation-wages dynamic in rural India, the budget has been criticized for ignoring key welfare schemes. The total outlay for the 14 biggest centrally-sponsored schemes, some of which were a big help during the pandemic, will see virtually no hike, a Mint analysis showed.
These schemes together are already set to see a decline of 2.9% in spending in 2022-23. Their budgeted growth, relative to these revised estimates, will be 0.8% in 2023-24. Contrast this with the overall economy, which is projected to grow 10.5%. While allocations seem marginally bigger, their share in total expenditure has reduced, in some cases even below pre-pandemic (2019-20) levels. That’s true right from the rural jobs scheme to education and health.
Against the backdrop of the government’s constrained finances, will the big bet on capex over welfare schemes pay off? Economists do believe the former will aid growth, but the reprioritization from revenue to capital expenditure may not be ideal: There are doubts whether the capex can revitalize private investments amid global recession risks.
“Capex does add to the GVA (gross value added) and help in some demand creation," said Renu Kohli, a Delhi-based macroeconomist. “But some bit of consumption demand support would have been useful as high inflation has been eating into consumers’ purchasing power over and above the income shocks faced by those at the bottom of the pyramid."
No Lessons Learnt?
The stress in the low-income group is evident from the higher revised estimates of spending on some schemes. The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) may overshoot the budget by 22%, the Pradhan Mantri Awas Yojna (PMAY) by 61%, and the mid-day meal scheme (PM-Poshan) by 25%. Yet, the allocations to these schemes for 2023-24 are muted.
MGNREGS and PM-Poshan have lower allocation, while PMAY and Integrated Child Development Scheme allocations have barely risen—which in real terms will be negative growth.
Finance minister Nirmala Sitharaman has justified the huge MGNREGS cut saying the Centre had given the money to PMAY, which would create the same kind of jobs as MGNREGS was expected to create. But while the “66% enhanced allocation" to PMAY over 2022-23 budgeted estimates created much buzz and cheer, the rise is just 3% relative to the revised estimates.
Multiplier Effect?
Capital expenditure can have a multiplier effect on the economy. But with receipts growth muted, the only way capex can be raised further in 2023-24 while also narrowing fiscal deficit was by curtailing other expenses. Recent trends suggest the government tends to do the same to curtail fiscal deficit. This time, too, the 50-basis-point (bps) cut in fiscal deficit as a percentage of GDP expected in 2023-24 is set to come mainly on the back of a 40-bps compression in overall expenditure, with the social sector schemes seeing a blowback.
“It is not the preferred approach in a growing economy," said Rathin Roy, managing director at think tank ODI. “The government needs to support consumption and investment." Moreover, the budgetary support to capex has only compensated for the lack of PSU investments, he added. “There is no multiplier effect as total capital outlay as percentage of GDP is the same as FY20," Roy said.
Global Trends
The budget’s priorities have reignited the common debate of investment versus welfare. But governments across the world continue to spend on providing essential services such as health, education, and pensions as a way to provide safety nets to their populations. They are also seen as critical for poverty alleviation and are human capital and development multipliers. An analysis by Unicef and the International Policy Centre for Inclusive Growth shows that developed countries and regions—flush with public funds—are leading the way when it comes to providing social services, spending up to 15% of GDP on social services infrastructure. South Asia languishes at the bottom (5% of GDP), with India going up to just over 6% of GDP on provision of social services, latest available comparable data shows. At a time of continuing challenges in parts of the economy, the Centre’s attempt at a balancing act may have been left wanting.
