The Indian economy is expected to witness a 7.7% decline in GDP in the current financial year as per the Economic Survey. Also the projected growth for FY 21-22 is 11%. So effectively as per the economic survey the country is expected to grow by 2.4% in two years ( from 2019-20 to 2021-22). As IPD pointed out the impact of COVID even though will be reduced but still will be very much there. Moreover there has been a slowdown in the economy even before COVID. Unemployment was at its peak pre COVID and increased further during COVID. As the economy started opening up, the unemployment numbers showed some improvement. But again by December, 2020, there was again a surge in the unemployment numbers as per CMIE.
There has been a slowdown in demand in the economy much before COVID. The problem has further aggravated with over 9% drop in consumption demand expected in the current fiscal. Moreover lack of demand means lack of profit and hence lack of investments in the economy. The investment is expected to decline by over 14% this fiscal. This will be a negative growth in investment second year running. So a boost up in demand is the need of the hour. Moreover measures that can induce demand and also bring in more investments needs to be looked into.
The impact of COVID implies a specific focus on health sector is utmost necessary. The need for building a health infrastructure for the entire country which is accessible to all is the need of the hour. This has been the learning from COVID. Education sector has been one of the worst hit by COVID. the schools and colleges were closed and gradually opening up now. Online classes have happened but in a country like India many people have little or no access to regular internet to attend classes on internet. Hence a focus on this sector is required.
In this backdrop, it becomes extremely important to critically assess the union budget tabled in the parliament on 1st Feb, 2021. The budget allocation increased in FY 2021-22 by 14.4% as compared to the budget allocation of 2020-21. But when compared to the revised estimate of allocation in 2020-21, the overall budget allocation has remained more or less flat in FY 2021-22. One way of inducing demand in the economy will be through increasing government spending.
The budgetary allocation for the fiscal year 2021-22 did not see any plan in that direction when compared to the revised estimate of allocation last fiscal ( FY 2020-21). It needs to be noted here that the revised estimate of FY 2020-21 actually shows a 28% growth in allocation as compared to the actual spending in 2019-20. So compared to that, it can be said the growth in budget allocation sees a significant fall for the next fiscal ( FY 21-22).
One major component of budget expenditure is capital expenditure by the government that goes into the creation and maintenance of assets like schools, colleges, hospitals, roads, bridges, dams, railway lines, airports and seaports.
A surge in this implies more investment from government, which will bring in more work in the economy and will in a way boost up employment and hence will have a impact on inducing demand in the economy as with more employment, more spending is likely to get induced. So the projection of the capital expenditure to rise from 13.5% in budgetary allocation in FY 20-21 to almost 16% in FY 21-22 is a step in the right direction.
One of the major aspect of any budget remains how much of the allocated fund has been spent in the current fiscal year. Because the budget happens before the fiscal ends, we get a revised estimate and not the true actual figures. But a comparison of budget estimates and revised estimate will be a good measure on how much is expected to be spend out of the total allocated fund for different aspects.
As expected given the pandemic there has been a surge in expenditure in health shooting the revised estimate higher than the budget estimate. But during same time, the revised estimate of drinking water and sanitation has been significantly lower than the budgetary estimate for 20-21. The total spending for both school education and higher education showed a decline against the budgeted allocation in FY 2020-21. The decline had been higher for higher education.
There has been additional allocation in MGNREGA to address the loss of job and reverse migration to rural areas during pandemic. This lead to a significantly higher revised estimate in employment generation schemes in total and MGNREGA in particular this fiscal. Direct money transfer has been considered as a key to boost up demand. PM Kisan has been a key scheme for direct money transfer. But the spending in that scheme in terms of the revised estimate has been lower than the budgeted allocation. Not only PM Kisan, overall spending in agriculture in terms of the revised estimate has been significantly lower than the budgeted allocation.
Let us now look into how has the budgeted allocation in the important areas has been in for the next fiscal (FY-21-22) as compared to the budgeted allocation in FY 20-21.
As expected health has seen a increase in budgeted allocation for next fiscal as compared to this fiscal. The most significant increase in allocation happened for drinking water and sanitation for the next fiscal. In the current fiscal only 79% of the allocated fund in budget was spent on this area as per revised estimate . It remains to be seen what will be the trend next year, specially with the increase in allocation.
The major setback of this budget will be in terms of the reduction in allocation in agriculture and education. The education sector which is coming out from the difficult period of pandemic needed that extra boost. Moreover PM Kisan, one of the flagship projects for direct cash transfer to farmers saw a reduction in allocation. Not only agriculture, even MGNREGA also sees almost a stagnation in terms of budgeted allocation. It needs to be noted here that for FY 20-21, we had a additional increase in MGNREGA in between the year. So in comparison in revised estimates of 20-21 there is actually a reduction in allocation in FY 21-22 for MGNREGA allocation. So the two major focus areas of rural India in terms of employment generation, agriculture and MGNREGA has seen a decline in allocation in FY 21-22.
In conclusion it can be said that this is a mixed budget. Unemployment has been the major challenge in the economy for the past few years and it aggravated during COVID. One positive step in this regard to address the demand issue lies in the increased allocation in capital expenditure which can lead to higher employment and hence more income to people leading to higher demand. But on the other hand there is a reduction in allocation of MGNREGA when compared with revised estimates and no employment guarantee schemes announced for urban India. The slow down of demand has been widely talked about over the years. The budget sees no significant push in that apart from the capital expenditure measure discussed above. There is no additional direct money transfer schemes taken up for the coming financial year. Further the allocation on the present direct money transfer scheme of PM Kisan has been reduced. Also the overall budgeted expenditure of the government also remains constant when compared to the revised estimate of FY 20-21. So no additional demand push is expected to come from government as has been the prescription of all economic experts worldwide. The government has promised to double the farm income. But the overall allocation on agriculture sees a decline.
Health sector has received a significant boost. The overall allocation has increased and additionally a fixed fund has been allocated for COVID vaccine. Moreover there has been a significant surge in well being expenditure in terms of focus on drinking water and sanitation. This is a welcome step of the budget and remains a major highlight of this budget. There is more scope of increasing health expenditure. Steps have been taken in the right direction. But the biggest worry has been the reduction in allocation in education. This year needed more focus on education specially with the shock of pandemic. This has been one of the major lowlight of this budget.