Budget 2022: Address K-shaped distortions—recovery can follow

Since the budget will be presented days ahead of elections in five states in which the ruling party has high stakes – Uttar Pradesh, Punjab, Uttarakhand, Manipur and Goa – the temptation to provide sops would be overwhelming. While material help of all kinds, including direct income support, to a large population impoverished due to the pandemic loss of jobs, businesses and high healthcare cost are needed and desirable, the sight of the structural challenges should not be lost.

High reliance on supply-side solutions and big-ticket ‘reforms’ after the pandemic hit in 2020 has predictably distorted the recovery. Instead of a V-shaped recovery, it is a K-shaped one in which some sectors are doing well while others are not. The first advance estimates of national income show that the overall GDP is likely to surpass the pre-pandemic FY20 level by 1.3% but its main growth engine, private consumption, is likely to fall by 3% (from the FY20 level). The RBI’s January 2022 bulletin says while farm sector remains “upbeat” with good kharif production, industrial and services activity exhibit “a halting recovery” and services “yet to catch up” with FY20 level. Even within industry, large ones (listed companies) have booked record profits while small businesses and industries have taken a severe hit and could have benefited from better handholding.

K-shaped structural distortions

Two recent reports highlight the deepening structural distortions in the economy.

The latest round of ICE360 Survey 2021 (during April-October 2021 across 100 districts) by Mumbai-based People’s Research on India’s Consumer Economy (PRICE) shows an unprecedented change in the income trends. In an unprecedented reversal in the earlier trend, the annual income of the poorest 20% of households plunged to -52.6% in five years between FY16 and FY21. During the previous 11 years between 2005 and 2016, their income had risen by 183%. As for the richest 20%, their income grew by 39% and 34% during the corresponding periods, respectively.

In fact, during the pandemic FY21, the income of 60% of households (poorest, lower middle and middle) declined while that of the top 40% (upper middle and rich) increased, taking the overall average to a positive growth of 8.4%. If one goes by the overall growth, the inherent distortions (worsening income of 60% of population) become invisible. The survey also showed that the urban poor was hit harder than rural poor.

Earlier in the month, the Oxfam International’s ‘Inequality Kills’ report had said during the pandemic (March 2020 to November 2021) more than 46 million Indians estimated to have “fallen into extreme poverty in 2020 (nearly half of the global new poor according to the United Nations)”, while billionaires’ number rose from 102 to 142 and their wealth increase from $313 billion to $719 billion (by $406 billion).

These findings are in keeping with several other studies on the impact of the pandemic and it is this K-shaped distortion that needs urgent attention not just to lift a massive population out of poverty again but also to ensure that growth is high and sustainable in future. It was probably with this in mind former RBI governor Raghuram Rajan said in an interview recently: “My greater worry about the economy is the scarring to the middle class, the small and medium sector, and our children's minds, all of which will come into play after an initial rebound due to pent up demand. One symptom of all this is weak consumption growth, especially for mass consumption goods.”

The pandemic has not only caused loss of incomes it has also worsened health and education deprivations, which too need attention for improving quality of human resources and boost growth. In fact, it was because of such deprivations and inequalities hitting consumption and growth that Rajan’s predecessor Duvvuri Subbarao had forewarned the K-shaped recovery about a year ago.

The above two findings (Oxfam and ICE360) throw up rising inequality caused by the pandemic and pre-pandemic economic disruptions, but by no means it is a recent development. Thomas Piketty and his fellow economists have shown over the years that inequality in India started to grew after the post-1980 reform era, particularly after the 1991 liberalisation, which brought market-friendly reforms. Growth jumped, lifting millions out of poverty, but progressively the income share of the bottom 50% and middle 40% went downhill while that of the top 10% and top 1% skyrocketed. In their latest World Inequality Report, they show that in 2020, India’s top 10% held 57% of the total national income and 65% of the total national wealth, while the bottom 50% held very little – 13% of income and 6% of wealth.

There are then two trends within the rising inequality. One is the long-term trend starting after the reform era and the other is a sudden spike, accompanied with growing poverty, during the pre-pandemic disruptions caused by demonetisation and GST and the pandemic lockdowns. Both the trends call for short and long-term policy interventions and strategies which seek to create employment, lift people out of poverty and bridge the income gap. Half-hearted measures aimed at short-term electoral gain will keep the overall trends unchanged and hence the need to be careful with welfarism expected from the budget.

Welfarism needed but not enough

There are many social welfare schemes run by the central and state governments which overlap, fragmented, ad hoc and inadequate. Take a look at health and education critical for building quality human resources. Public spending remains awfully inadequate for decades and policy prescriptions are half-hearted at best. For example, Ayushman Bharat Yojana (PMJAY) provides free healthcare to the bottom 40% of the population, but largely operate in government hospitals where treatment is already free and leaves out the rest of population to face ‘catastrophic’, out of pocket, health expenditure which annually drives 60 million Indians into poverty in normal times. The NSO’s 2017-18 survey showed only 14.1% of people in rural areas and 19.1% in urban areas had any form of health insurance cover. The pandemic has further accentuated the need for universal healthcare and strengthening of public healthcare infrastructure, and which calls for significant jump in public spending.

Similarly, the education policy needs to refocus on building more government schools, provide better digital infrastructure, apart from addressing the perennial problems of poor quality of education and lack of adequate, trained and regular teachers. A survey led by economist Jean Dreze during 17 months of lockdown found that only 8% rural school students and 24% urban school students were studying online regularly and 37% were not studying at all. It also found that more than 25% shifted out of private schools due to loss of household income or online education did not work well. Relying on private sector to provide schooling is not an option any more.

Attention is needed in other areas also. The rural job guarantee scheme MGNREGS of 2005 was a response to a prolonged rural distress. The menial, low-paying job it offers is meant to provide emergency relief, not solve the job or income crisis in rural areas but it has acquired permanency. The number of households getting jobs under it has steadily increased from 49 million in FY13 to 76 million FY21 and that of individuals from 79 million to 112 million during the same period.

The downside is that it has become a convenient excuse for not addressing rural job or income crisis in more meaningful way. Raising budgetary allocation for it during the pandemic crisis, for example, is considered enough of good governance. Now the demand for a similar scheme in urban areas is gaining ground due to growing urban job crisis. MGNREGS like employment generation, while it helps people in a crisis, is not exactly what the government should rely on entirely. It should seek to provide better paying and more productive works that create valuable assets and boost growth.

PM-Kisan scheme is an example of muddled thinking that overshadowed the need for multiple interventions in agriculture (China like land reforms, higher investment etc.) to double farmers’ income the government has been promising. It was announced in a hurry, just ahead of the 2019 general elections, and provides ₹6,000 a year to all farmers in three equal instalments.

What was the logic of fixing ₹6,000 (several state governments were already giving Rs 10,000 or more) and giving it in three equal instalments in a year when the cropping seasons are two – rabi and kharif? State governments time it to the two cropping seasons.

Besides, why don’t landless agriculture workers, who outnumber cultivators – 55% landless as against 45% cultivators (farmers with land) – and surely need greater support, don’t get any direct cash support from the central government? The Odisha government, for example, gives ₹12,500 to a landless family, ₹2,500 more than that to a farmers’ family. Why not PM-Kisan? After all, rural distress was not felt by farmers alone. Again, it was the rush to harvest electoral gains as farmers had been agitating for more MSP and other government support for years by then.

Contra-intuitively, what followed PM-Kisan was three new farm laws, first brought as ordinances during the pandemic lockdown and then rushed through the Parliament without consulting farmers, without any debate, legislative scrutiny or listening to objections and demands raised by opposition parties.

These laws not only pit farmers (more than 85% of who are small and marginal ones owning less than 2 ha land) against corporate entities in unregulated private markets but also allowed corporates to directly negotiate contract farming with farmers – both without state oversight, while agriculture is a state subject and states have their own marketing and contract laws. Civil courts were kept out of dispute resolution. One of these laws diluted the norms to check hoardings and black marketing and removed several key food items like cereals, pulses, edible oilseeds and oils, potato, onion etc. from the list of essential commodities. The laws were withdrawn after more than a year’s protest.

Surely these laws were not in the interest of farmers, else they wouldn’t have protested outside Delhi for more than a year and surely not meant to double their income by 2022-23. Why were the farm laws imposed when farmers had already demonstrated their will to fight and capacity to organise in the past several years while either demanding higher MSP or seeking other government help in view of rural distress and growing farmers’ suicide? Though the inside story is unlikely to be revealed anytime soon, it wouldn’t be quite out of place to presume that PM-Kisan scheme played its part and lulled the government into thinking that the farmers could be blindsided with it.

Now that the protesting farmers and looming state elections forced the government’s hands to withdraw it what happens to the promise of doubling farmers’ income by 2022-23? There are no clear answers.

The above examples are to illustrate the larger point that the budget must look beyond short-term electoral gains to make meaningful policy interventions to address the structural challenges to remove K-shaped distortions and build the pathway for high growth.