Development Expenditure

 

Context:

  • The Union Budget for 2022-23has projected a fiscal deficit of 6.4% of nominal GDP, a narrowing from the 6.9% assumed in the revised estimates for the current fiscal year ending on March 31.

 

Overlook of the Budget:

  • Though every economic crisis involves sharp reduction in output growth rate, the specificity of the present crisis in India lies in the sharper reduction in labour income as compared to profits.
  • The consequent reduction in income share of labour was associated with a sharp fall in consumption-GDP ratio as well as absolute value of consumption expenditure during the pandemic.
  • While the GDP in 2021-22 is estimated to attain the pre-pandemic level, real consumption expenditure remains to be lower as compared to 2019-20.
  • The squeeze in labour income and consumption expenditure witnessed during the pandemic was itself preceded by what turned out to be the longest episode of growth slowdown in the Indian economy since the liberalisation period.

 

Shortcomings:

  • Continuing with the objective of fiscal consolidation, the Budget falls short of addressing both these challenges.
  • There are three distinct features of this fiscal consolidation process:
  • Firstly, while share of revenue and non-debt receipts in GDP has remained more or less unchanged, the objective of fiscal consolidation has been sought to be achieved primarily by reducing the expenditure-GDP ratio.
  • The brunt of this expenditure compression fell on revenue expenditure. Continuing with the fiscal strategy adopted in the last two years since the pandemic, the allocation of capital expenditure as a share of GDP has been marginally increased in 2022-23 as compared to 2021-22.
  • Though additional capital expenditure could be financed either by postponing fiscal consolidation process or by increasing revenue, however, the budget has sought to achieve fiscal consolidation by reducing the allocation for revenue expenditure-GDP ratio.
  • Secondly, since the bulk of the revenue expenditure comprises of food subsidies and current expenses in social and economic services, reduction in the allocation for revenue expenditure has been associated with fall in several key expenditure that affect the income and livelihood of labour.
  • For example, allocation for both agriculture and allied activities and rural development registered a sharp decline in nominal absolute terms in 2022-23 as compared to 2021-22.
  • Similarly, in the midst of the ongoing pandemic, total nominal expenditure on medical and public health registered a sharp fall in 2022-23 as compared to 2021-22.
  • Such expenditure compression has been associated with the overall fall in the allocation for total social sector expenditure.

 

Implications:
  • The objective of fiscal consolidation along with the inability to increase revenue receipts has posed a constraint on development expenditure.
  • With non-development expenditure comprising of interest payments, administrative expenditure and various other components which are typically rigid downward, the brunt of expenditure compression has fallen on development expenditure.
  • The fiscal consolidation strategy carried out in the last years has once again led the development expenditure ratio to slide downward.
  • The reduction in the allocation for development expenditure ratio for 2022-23 reflects reduction in the allocation for food subsidies, national rural employment guarantee program, expenditure in agriculture, rural development and social sector.

 

 

Way Forward:
  • What the Indian economy lacks at the moment is an effective policy instrument that can boost labour income and aggregate demand.
  • While setting the fiscal deficit level in 2022-23,there is a need to nurture growth, through public investment, to become stronger and sustainable.

Source: THE HINDU.

Leave a Comment