The Rural Economy and the Budget

Nirmala Sitharaman, Union Finance Minister, presented the Union Budget 2023-24. Union budgets can be broken down into two categories. The first is as a routine audit of the government’s revenues and expenditures. This second aspect provides insight into the government’s assessment of the economy’s challenges and potential solutions.

The first consideration is the standard accounting exercise of the government’s revenues and expenditures.

  • Projections are less trustworthy: With governments failing to spend what is announced in the budget, this has ceased to be a good metric over time. While the practise of entering off-budget is no longer relevant, revenue projections are much less reliable.
  • Create a comprehensive budget: However, the budget remains important as the government’s most important, and possibly the only, comprehensive economic document.

Second, the government’s assessment of economic challenges and solutions.

  • Premature conclusion: While the pandemic fog has lifted and supply bottlenecks have eased, it is still too early to declare the economy fully recovered.
  • The average per capita income is low: Real per capita incomes in 2021-22 are still lower than in 2018-19, and overall growth between 2016-17 and 2021-22 is at its lowest level of 3.7% in any five-year period in the last four decades.

The pandemic effect:

  • Economic slowdown: The fact that the economy was slowing down before the pandemic makes it clear that Covid only exacerbated the already fragile economic situation.
  • Energy directed towards pandemic management: The structural factors that caused the slowdown remain, as the government’s efforts in the last three years have been directed towards pandemic management.
  • The most significant of these is the decline in demand, both for consumption and investment. Private consumption accounts for nearly 60% of the economy, and this growth engine has stalled.
  • The situation is far worse in rural areas, where wages have been stagnant for nearly a decade. In the last five years, farmers’ incomes have either declined or remained stagnant.

Budget and rural economy criticism

  • Withdrawal of spending: What has happened is that almost every line item that was important for rural economic recovery has been cut. With spiralling inflation and the removal of the safety net of free foodgrains, rural areas are likely to face an uncertain future.
  • The agricultural budget is lower than the allocation made last year: In real terms, the budget has shrunk by 10% at a time when the agricultural sector is in its worst crisis. With the removal of the fertiliser subsidy, the rise in input costs for both energy and fertilisers is likely to worsen.
  • Cash transfer allocation has declined: Even the nominal cash transfer provided as part of the PM-Kisan has seen a decrease in allocation. However, this budget is no different from the previous five years.
  • Agriculture investment has decreased: Between 2016-17 and 2020-21, the most recent year for which data is available, public investment in agriculture fell by 0.6% per year. This is a time when the agrarian economy is experiencing its worst profitability crisis.
  • Budget cuts for the non-farm sector: The non-farm sector’s contribution to the rural economy has increased, but budget allocations have decreased.
  • As an example: The Ministry of Rural Development’s budget is 13% lower than the revised expenditure from last year. The budget for the National Rural Employment Guarantee Scheme (MGNREGA) has been reduced in the revised estimates for 2022-23. This is the smallest amount allocated in the last five years in comparison to actual scheme expenditure.
  • Only the hosting scheme has grown: The rural housing scheme is the only one that has seen an increase in allocation, from Rs 48,422 crore in 2022-23 to Rs 54,487 crore.

Interventions on the supply side in a demand-constrained economy

  • Supply-side interventions are preferred: Even when there is excess capacity in a demand-constrained economy, the government prefers supply-side interventions. This understanding is reflected in a nearly one-third increase in investment allocation. The majority of this is for railways and roads, providing a much-needed boost to the infrastructure sector.
  • The private sector must accompany: However, given the small share of public investment, it is unlikely to be sufficient unless accompanied by increased private sector investment. Unfortunately, the private sector has not responded to rising public investment or tax breaks provided in 2019.
  • Given the low employment elasticity of these investments, the overall impact on employment and domestic demand will be negligible. In any case, the increased investment is welcome.

@the end

The issue with this budget is not one of accounting, but of economic policy. This was the last full budget in which the government could take significant steps to revitalise the economy. This necessitated prioritising allocations for reviving consumption demand, stimulating private investment, and shielding people from the dangers of high inflation and a slowing economy.

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