Budget 2022: Bottoms-up growth model must replace top-down approach

Prudence demands that economic policies, particularly annual budgets, should focus on sectors (agriculture, industry and services) that contribute the most to income (GDP) and employment and also benefit the maximum number of people. What has happened in the recent past is far from the case.

Let us see which sectors contribute the most to income and employment.

In 1950-51, the income share (GDP) of agriculture, industry (which includes manufacturing) and services (which includes construction) were 51.9%, 11.1% and 36%, respectively, as per the 2004-05 GDP series (constant prices). In FY21 (PE), their shares (of GVA) were 16.4%, 21.7% and 61.9%, respectively. The manufacturing’s share was 11.1% in 1950-51 and 16.9% in FY21.

In 1950-51, the employment share of agriculture, industry and services were 72.4%, 9.3% and 18.3%, respectively. In 2020 (closest to India’s FY21), their shares were 44.3%, 12.2% and 43.5%, respectively, as per the ILO estimates based on the PLFS 2019-20 data. The Government of India, which carries out the PLFS surveys annually, doesn’t provide such sector-wise distribution of employment for reasons not yet known (except for lethargy and carelessness). The manufacturing’s share was 8.8% in 1950-5 and 11.3% in 2020.

Notice the poor contributions of manufacturing since 1950-51 – 11.1% to 16.9% in income and 8.8% to 11.3% in employment – on which India has been banking on to remove poverty and bring prosperity.

Both sets of data (sectoral shares of income and employment) would show that budgets should be focusing far more on developing agriculture and services, rather than manufacturing or industry, but that hasn’t been the case, at least not since the reform and liberalisation began in 1980s and 1990s. The agriculture sector didn’t really figure in the reform and liberalisation policies (not even in trade liberalisation as agricultural commodities remained tightly regulated) and services continued to be an adjunct of industry as it ever was.

Why such lopsided approach is a tale for another day; suffice it to say that the lop-sided approach to policymaking endures.

Top-down economy

What were the key big-ticket economic ‘reforms’ the last budget announced?

It announced en masse privatisation of PSUs (except for a few in ‘strategic’ sectors); expanded privatisation to include two public sector banks and a public sector insurance company and set up a bad bank to take care of stressed assets in banks, mostly in the public sector. There were other notable features of the budget too. One was to increase import tariff of a large number of manufacturing goods – from electronic and mobile phone parts to iron and steel, chemicals, auto parts, solar panels, textiles etc. – to protect domestic industries from outside competition and the other was a substantial increase in ‘subsidies’ and social sector spending, though less than FY21 level for the latter.

This is line with the long-term trend. Since it took over in 2014, the BJP-led NDA government has announced several big-ticket economic ‘reforms’: demonetisation, GST, liberalised FDI, bankruptcy code (IBC), farm and labour laws (farm laws have been withdrawn now), disinvestment and privatisation of public assets and corporate tax cut. Former Niti Aayog vice chairman Arvind Panagariya described GST and corporate tax cut as “two truly mega reforms”.

Close scrutiny would reveal that the primary focus of all these ‘reforms’ is industry, rather than agriculture or services. The claims of demonetisation’s gains are imaginary except for a push to digital banking; GST was pushed primarily by industry to reduce the cascading effect of multiple indirect taxes imposed by central and state governments; FDI liberalisation is aimed at attracting foreign investment to manufacturing of goods and services; privatization and corporate tax cut are to boost private industry; IBC and bad banks are to address loan defaults by large private industries and the proposal to allow large industrial houses to run banks also aimed at private industry, rather than a push to agriculture and services. In fact, nationalisation of banks in 1960s and 1970s expanded the credit facilities to agriculture and smaller industries in rural and semi urban areas.

Not just in India but globally, the liberalisation push (less regulation, free capital flow, free trade and privatisation of public assets) has led to income and wealth increasingly accumulating at the very top of the economic pyramid and inequality skyrocketing, both indicating that economic growth is skewed in favour of a few at the cost of the vast majority.

High subsidies and new welfarism

The poor have not been forgotten. But the past few years has seen subsidies and welfare schemes as the primary mode of support, which provide relief but don’t really lift people out of poverty and substantially improve their living standards. Recent findings of the ICE360 Survey 2021 by Mumbai-based People’s Research on India’s Consumer Economy (PRICE) have demonstrated how the past trend of reducing poverty reversed and income of the poorest 20% reduced by half (by 52.6%) during the five years between FY16 and FY21. This is the period that saw flawed demonetisation, ill-planned GST and the devastating pandemic.

The last budget showed a dramatic rise in fertiliser and food subsidies in FY21 – ₹1.3 lakh crore on fertiliser subsidy against the budgeted ₹71,309 crore (1.9 times more) and ₹4.2 lakh crore on food subsidy against the budgeted ₹1.2 lakh crore (3.5 times more). The gap was not because of a sudden spurt in subsidies in FY21 but accounting for the accumulated subsidies hidden from budget disclosures through off-budget borrowings for years. Therefore, the budget allocations for FY22 for these subsidies were substantially lower.

The social sector spending, including health and education, saw a different trend.

The RBI’s analysis of the last budget showed the social sector spending had been going down since FY15 – from 2.5% of the GDP in FY13 and 2.4% in FY14 to 1.7% in FY20. In FY21 (the first pandemic year), it went up to 3.7% and then went down to 2.4% for FY22(BE). Health and education spending should have been more for FY22, given the pandemic deprivations of a large population, but that was not the case entirely. The health spending was 0.4% of the GDP, up from 0.2% in FY2(RE) and education spending 0.2%, same as in FY21(RE).

With such low spending on health and education, it is unlikely that the pandemic’s impact could be addressed in a meaningful way.

All this, however, presents a partial picture. The NDA government has accelerated the delivery of many goods and services to the poor since 2014 to expand the coverage. More bank accounts have been opened for the unbanked and delivery of cooking gas, electricity, housing, tap water and toilets have improved at a faster rate.

But here is a catch. In December 2020, Arvind Subramanian, who served as chief economic advisor to the government during 2014-18, and two of his colleagues wrote about this “new welfarism” manifest post-2014. They wrote: “The New Welfarism of the Narendra Modi government represents a very distinctive approach to redistribution and inclusion. It does not prioritise the supply of public goods such as basic health and primary education as governments have done around the world historically; it is also somewhat ambivalent about strengthening the safety net which past Indian governments have pursued with mixed success. Instead, it has entailed the subsidised public provision of essential goods and services, normally provided by the private sector, such as bank accounts, cooking gas, toilets, electricity, housing, and more recently water and also plain cash.”

Their assessment listed two distinct features of this new welfarism. (i) access to goods and services have “accelerated since 2015” and (ii) the “calculation” behind the new welfarism is that “there is rich electoral opportunity in providing tangible goods and services” and “deliverables can be attributed to the Union government…to erase any doubt about the source of the benefits, the policy is backed up by strong and persistent messaging, highlighting the achievements and the benefactor”.

Better delivery of goods and services to the poor helps and welfarism is quite in keeping with the Directive Principles of the Constitution. Yet, three points need closer attention: (a) non-prioritisation of universal healthcare and basic education (b) not providing social security to the vast majority of informal sector workers (who constitute 94% of the total workforce and hit the hardest due to demonetisation, GST and pandemic (the new labour law makes vague promises and not yet operationalised) and (c) the electoral calculations behind the welfarism.

While the first two points need no elaboration, the third one (electoral calculations) does because of its implications on policymaking.

Welfarism for votes

That the PM-Kisan scheme is half-baked is known. It provides an annual cash assistance of ₹6,000 to all farmers (with landholding, whether small, marginal or large) but not farm labourers who are landless and constitute 55% of the total agriculture workforce (as per 2011 Census). They survive on casual labour outside agriculture for most part of the year (no farm work is available after sowing and harvesting in kharif and rabi seasons, which last a few weeks at a time). They need more help than farmers because they are poorer (landless) and yet, contribute more to agricultural production. Recent years has seen a reverse migration of work from manufacturing to agriculture as manufacturing jobs have shrunk but PM-Kisan can’t help them either.

Why was PM-Kisan designed poorly? It was because the scheme was announced out-of-the-blue, just ahead of the 2019 general elections, to win votes of long agitating farmers. There was no debate, consultations or application of mind. It didn’t pause to think about the longstanding problems of farmers or rural distress that the protesting farmers had been pointing at.

Same is the case with the Ayushman Bharat Abhiyan (PMJAY) announced in September 2018, months ahead of the 2019 general elections.

It is a massive scale-up of the failed and by then abandoned Rashtriya Swasthya Bima Yojana (RSBY) of 2008. Before the pandemic hit, in January 2020, the Indian Medical Association (IMA), the apex body of medical professionals in India, had issued a public statement declaring its absolute failure: “Ayushman Bharat, the flagship of the current government, is a non-starter and operates more in government hospitals where treatment is already free. 15% of the money paid to hospitals, including government hospitals. is siphoned off by insurance companies...” There is no study or survey yet to show that Ayushman Bharat provided yeoman’s services during the pandemic either.

More subsidy and more welfarism is a mark of failure of a country’s growth model. The Scandinavian countries have adopted a different mode – welfare state – in which state/government provides free and universal health and education facilities. These are developed economies and the happiness quotient of their people are the highest in the world for a long period. Many European countries, like the UK, follow their model in various degree. But India follows the US model where the healthcare is not universal, insurance-based and driven by private sector and hence, very expensive (Ayushman Bharat is also insurance-based). This model spectacularly failed the US citizens during the pandemic, which was not the case in the Scandinavian countries. Education in the US is also private sector driven, loan-based and very expensive causing immense pain to students, as many media accounts of the recent past have shown.

These are not unknown to policymakers and economists.

The two most significant challenges facing India is a prolonged job crisis and growing poverty. More subsidies and more welfarism would do nothing to address these challenges, except for providing marginal relief for a few months. Higher budgetary allocation for the menial, low-paying MGNREGS (less than minimum wages in all states, except Uttar Pradesh) is not the answer to job crisis. Similarly, higher allocation of subsidised ration (PDS) is not the answer to growing poverty.

The forthcoming budget, like many before it, will fail to make any material difference to the lives of the vast majority of Indians if it doesn’t address the substantive challenges (jobs and poverty) and go for fishing votes again.

What needs to be done is known. The top-down, industry-focussed budgeting and economic policies should yield place to a bottom-up approach in which the vast majority of people are at the centre and so are the sectors they have been historically supported with more jobs and more incomes, namely agriculture and services. That would make material difference to consumption demand, boost industry and growth, besides increasing the happiness quotient Indians, who rank at the bottom now – India stood 139th among 149 countries in the UN World Happiness Report 2021.