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The Prime Minister perfectly summed up his government’s approach to the budget and the underlying economic thinking while briefing his party workers a day after the budget. He said: “When the government incurs such a huge expenditure, it will bring more investment, expand modern infrastructure, and create a positive impact among iron and cement producers…It will create many job opportunities as well.” He added that this would eventually provide relief to the common man, making his life easier and better.

This high reliance on supply-side solutions like infrastructure spending and industrial production while the problem really is that of low demand, and push for high GDP growth instead of addressing the known challenges staring on the face – chronic job crisis, growing poverty, hunger, inequality and high health and education deprivations – is typical of the Neo- liberal thinking that growth trickles down to benefit people at the bottom.

This is a deeply flawed thinking; growth doesn’t trickle down; the trickle-down theory is not even a cohesive economic theory but a political one popularised in the US by President Reagan and Trump, among others.

Growth doesn’t trickle-down to benefit masses

After President Trump pushed tax cuts for the rich and industries in 2017 using the trickle-down logic, the Wharton School, in a paper, described this concept as “the great hobgoblin of our time”, that is “used, often negatively, to characterize the view that reducing taxes on the rich will benefit the non-rich”.

Not just liberal (capitalist) economist and Nobel laureate Joseph Stieglitz, many others like him and even the celebrated stock market investor Warren Buffet, who should know a thing or two about how the economic systems work on the ground, have dismissed it. In a 2018 article in Time magazine, Buffet wrote: “Between the first computation in 1982 and today, the wealth of the 400 (wealthiest Americans) increased 29-fold – from USD 93 billion to USD 2.7 trillion – while many millions of hardworking citizens remained stuck on an economic treadmill. During this period, the tsunami of wealth didn’t trickle down. It surged upward.”

The high priest of Neo- liberal economics, the International Monetary Fund (IMF), has also found trickle-down grossly misleading after studying more than 150 countries. It published its findings in 2015, which read: “…if the income share of the top 20 per cent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 per cent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.”

There can’t be a bigger rebuttal to the Indian government’s flawed approach than this IMF’s study. The corporate tax cuts of 2019 (an annual loss of at least Rs 1.45 lakh crore) amidst fiscal constraints, ease of doing businesses, liquidity infusion and other enabling architectures like investment in infrastructure and incentives to industries (like PLIs) over the years have not crowded in private investment or bettered the life of people at the lower end of income and wealth to push higher GDP growth. These measures have led to more concentration of income and wealth at the top and more job-loss and poverty, not less.

The latest round of surveys by the Mumbai-based People’s Research on India’s Consumer Economy (PRICE) shows that the annual income of the poorest 20% households plunged to -52.6% in five years between FY16 and FY21; those of lower middle 20% and middle 20% declined by -32.4% and -8.9%, respectively. That is, the bottom 60% saw their income decline, while that of the top 40% increased, particularly the top 20% which saw their income zooming by 39% during the same period.

Even within industries, there is a K-shaped distortion.

During the pandemic disruptions, corporate profits reached historic highs. Fortune India magazine, which tracks top 500 listed companies, found that in FY21 their revenue growth slid but year-on-year growth in net profits turned out to be the best-ever at 75%. Business Standard newspaper analysed long-term trends in corporate profits to show that such profits have concentrated at the top 20%. In FY05, the top 20% accounted for 55.8% of profits, which went up to 72% in FY20 and was 65% in the first half (H1) of FY22. It said, this rise in concentration of profits at the top was accompanied with small and public sector firms struggled to make profits.

What all these findings reflect is that this concentration of wealth and income at the top has happened at the cost of the rest. The World Inequality Lab report recently produced a study to show how income and wealth inequalities in India grew dramatically after the reform-era started in 1980s, increasingly adopting Neo- liberal economics, particularly aggravating after 2000.

The budget and the underlying economic thinking of the India government should have been to address these K-shaped distortions so that growth is even and its benefits reach everyone, particularly those at the lower half of the economic pyramid, not just at the top. Employment is a good way of redistributing income and wealth. By not pro-actively seeking to create employment, the Indian government ignores another critical evidence.

Growth is not creating jobs or reducing poverty

The Azim Premji University has been tracking the state of jobs in India for several years. In 2018, it found that the co-relation between GDP growth and employment had significantly weakened. While the GDP grew at 3-4% in 1970s and 1980s, employment grew at 2%. Since 1990s, and particularly in the 2000s, GDP growth accelerated to 7% but employment growth slowed down to 1%.

In 2019, it analysed the periodic labour force survey (PLFS) of 2017-18 to point out that India lost a net of 9 million jobs after 2011-12, stating that this “happened for the first time in India’s history”. During this period of 2011-12 to 2017-18, the annual average GDP growth (constant prices) was a very robust 6.8%.

That was pre-pandemic. The pandemic saw further job loss, 15 million jobs were permanently lost during the first wave of the pandemic, the Azim Premji’s study of 2021 found. The second wave of the pandemic would have led to further loss of jobs.

Similarly, the budget ignores growing poverty which didn’t happen just because of the pandemic but also because of the flawed demonetization and GST, among others, that preceded it. One recent study shows that absolute poverty (Tendulkar poverty line) increased by 71 million during the pre-pandemic period between 2011-12 and 2019-20. This in line with the findings of the household consumption expenditure survey of 2017-18, which showed for the first time in 40 years ‘real’ consumption declined between 2011-1 and 2017-18, indicating that poverty is growing. This report was junked to hide the ugly truth.

When poverty was thus spreading, the average GDP growth (constant prices) during it (2011-12 to 2019-20) was a robust 6.4%.

Here is yet another distortion that needs to be factored in.

The first advance estimates for FY22 says, the GDP would grow at 9.2%, which means the GDP size would be 1.26% higher than that of FY20 but private consumption, the main engine of growth, would be 2.9% less than that of FY20. This means people would be spending less in FY22 than what they did in FY20.

If the income of people doesn’t grow, particularly those at the lower end who have a higher propensity to spend (than save), and their consumption expenditure remains below FY20, the demands for goods and services would be subdued and so would be the need for production of goods and services and capacity utilization. Why would then private investment grow?

While talking of growth, the budget miscalculates the level of inflation.

It projects nominal growth of GDP for FY23 at 11.1%, while the Economic Survey puts the ‘real’ GDP growth (after adjusting inflation) at 8-8.5%. This means the inflation is expected to be about 3%, which is illogical given the sharp rise in crude prices in recent weeks. Besides, the first advance estimates, released last month, shows the nominal growth to be 17.6% against a real growth of 9.2%. This means, for the purpose of budget calculations, inflation is actually 8.4% – far more than the CPI inflation of over 5% and certainly over 3% the budget assumes.

This miscalculation has its consequences: The GDP growth is exaggerated, adversely impacting revenue collections and expenditures for FY23.

Misallocations in the budget

The budget could have raised social sector spending, particularly on food, health and education to address multiple deprivations the pandemic has caused, reducing their consumption expenditure. Food subsidy is down by 27.8% from the FY22 (RE). While catastrophic health expenditure is known to send 60 million people into poverty every year in normal times, health allocation is down by 0.8% from the FY22 (RE) level.

The budget does allocate more for social welfare and education by 15% and 18.5% from FY22 (RE) level, respectively, but these are abysmally low at 0.4% and 0.2% of the GDP, respectively.

There is sector misallocation too. Agriculture is now providing more jobs, not less. The latest Economic Survey says, its share of employment increased from 40.7% in 2018-19 to 43.5% in 2019-20 – that is pre-pandemic period – but the allocation for agriculture is up by 2.5%, from FY22 (RE), which is less than the expanding GDP. In fact, the allocation has fallen to  0.59% of the GDP, from 0.64% of the GDP in FY22 (RE). The pandemic saw reverse migration and demand for rural menial jobs provided by the MGNREGS grow dramatically. The employment share of agriculture would have gone after the pandemic.

What the budget could have done?

In view of the challenges staring on the face, the budget could have taken several immediate measures.

For example, the central government has 8.9 lakh vacancies in its departments and ministry since March 2020. There are more vacancies in central PSUs, schools and colleges. The government could have prepared a consolidated list of vacancies and ordered filling of these vacancies on a priority basis to address chronic job crisis. It could have appealed to state governments to do the same.

Similarly, it could have addressed growing poverty by giving direct income support to the poor, just as it did for farmers in the 2019 budget, ahead of the general elections. The government then announced an income support of Rs 6,000 to all farmers. How about providing such support to the bottom 40-60% of population severely impacted by the pandemic? It is easy to identify them. The Ayushman Bharat uses the Socio Economic and Caste Census (SECC) of 2011 to identify the bottom 40% of its beneficiaries. The rest 20% could also be picked from the same SECC.

To raise income, the government could have also increased the minimum wages, stuck at Rs 176 for years. It could have also raised the MGNREGS wages, which remains below the minimum wages at Rs 209.3 in FY22 and Rs 200.7 in FY21. These measures could have immediately raised the income levels of a large workforce to boost consumption demand in the economy.

To sum up then, the budget should have adopted a bottom-up strategy to produce better results in place of its top-down one, which has led to the growth of the few at the top at the cost of the vast majority.

Prasanna Mohanty is a senior journalist, author and researcher who worked for many years with India Today writing extensively on public policy. Commentator on economic issues that touch the lives of the people. He is also a fellow at the Centre for Financial Accountability.

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