Editorial Analysis 24 July

ECONOMICS

FOR THE SOCIAL SECTOR, IT IS OLD WINE IN AN OLD BOTTLE

Source: THE HINDU

Introduction

• The Budget 2024 has faced criticism for not significantly increasing allocations for several key social sector schemes, despite the government emphasizing support for youth, farmers, women, and the poor.
• The Economic Survey describes India’s economic growth as being accompanied by social and institutional progress, but the budgetary allocations suggest otherwise, with real-term decreases in funding for various social programs.

Key Areas of Concern in Social Sector Allocations

Education	●School Education: The budget for school education increased by only ₹5,000 crore. However, the government expects higher 'recoveries' through increased fees and self-financing schemes in educational institutions, indicating a shift towards privatization. ●Higher Education: A minor increase of ₹3,000 crore was allocated for higher education, also expecting higher recoveries. This approach may make education less accessible to economically disadvantaged groups.
Health	●Department of Health and Family Welfare: The allocation increased by just ₹1,500 crore, which is inadequate given the rising healthcare needs and inflation. This small increase suggests limited capacity to improve healthcare services or expand coverage.
MGNREGA	●The budget for MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) remained at the same level as the revised estimates (RE) of the previous year, despite being a demand-driven scheme. This static funding could limit the availability of work, especially in rural areas where MGNREGA is a crucial source of employment.
Food Subsidy	●There is minimal increase in food subsidy allocation, despite the need to cover more of the population and the rising costs of food grains. The Public Distribution System (PDS) still uses outdated 2011 Census figures, potentially excluding many in need.
Critical Schemes	●POSHAN Scheme: This scheme, crucial for child nutrition, saw a slight increase to ₹12,467 crore from ₹11,600 crore. However, this is less than the actual expenditure in 2022-23, indicating a potential reduction in the reach or quality of the program. ●Saksham Anganwadi and Related Programs: Allocated ₹21,200 crore, up slightly from ₹20,554 crore. This does not account for inflation or the need for higher wages for Anganwadi workers, nor does it expand nutritional support significantly. ●Samarthya (Including PMMVY): This program's allocation decreased to ₹2,517 crore from ₹2,582 crore in 2023-24, continuing the trend of inadequate support for maternity entitlements and creche services. The PMMVY scheme has been criticized for excluding a large portion of eligible women, with benefits unchanged since 2017. ●National Social Assistance Programme (NSAP): The allocation remains at ₹9,652 crore, unchanged since 2009, offering minimal support (₹200 per person per month) to vulnerable groups like the elderly, single women, and the disabled. This is insufficient to cover inflation or expand coverage.

Shifts in Social Welfare Approach

The budget reflects a shift from direct welfare support to contributory and privatized models:

• Atal Pension Yojana: A contributory pension scheme that requires beneficiaries to contribute, potentially excluding those unable to afford it.
• Privatization in Education and Health: Increased reliance on privatization and commercialization of education and health services, focusing on cost-effectiveness rather than equitable access. This approach can widen inequalities, as market-driven models may not adequately serve marginalized communities.

Employment Challenge and the Private Sector

The Budget 2024 places high expectations on the private sector to address the employment challenge:

• Prime Minister’s Package for Employment and Skilling: This package includes government-sponsored internships, incentives for formalizing jobs through EPFO enrollments, and skill development programs. However, the allocation of ₹2 lakh crore over five years, much of which is tied to the private sector’s response, seems insufficient.
• CSR Funds Utilization: The budget suggests using Corporate Social Responsibility (CSR) funds to subsidize wages, effectively redirecting funds meant for broader social good towards corporate benefits.

Critique of the Approach

• The Budget 2024 has been criticized for its reliance on supply-side incentives rather than addressing fundamental issues like dampened demand and stagnant wages. This strategy has been attempted before and failed to significantly increase employment. The focus on incentivizing private sector employment does not address the underlying economic issues and may not lead to substantial job creation.

Conclusion

• The lack of substantial increases in social sector allocations, combined with a shift towards privatization and contributory schemes, suggests a reduction in the government's role in providing direct welfare support. This approach risks exacerbating inequality and failing to meet the needs of the most vulnerable populations. The budgetary strategy reflects a broader ideological shift towards market-based solutions, which may not adequately address the complexities of social welfare and human development.

ECONOMICS

A MESSAGE OF FISCAL STABILITY, GROWTH CONTINUITY

Source: THE HINDU

Introduction

• The FY25 Union Budget of India aims to reinforce fiscal stability and ensure the continuity of sustainable growth while promoting inclusivity in economic development.
• The budget addresses various aspects of the economy, with particular emphasis on improving employment quality, fortifying agriculture, and integrating Micro, Small, and Medium Enterprises (MSMEs) into the manufacturing sector.

Economic Context and Objectives

• Economic Growth and Fiscal Deficit:
  • India recorded an 8.2% GDP growth in FY24, characterized by a K-shaped recovery, where wealthier segments prosper while the lower-income groups struggle with stagnant wages and inflation.
  • The fiscal deficit stood at 5.6% of GDP in FY24, significantly higher than pre-COVID-19 levels, indicating a substantial government expenditure to support growth amidst slow private capital expenditure.
• Inclusive Growth Focus:
  • The budget highlights a commitment to making growth more inclusive by addressing the needs of vulnerable and lower-income segments. This includes enhancing employment quality, supporting agriculture, and empowering MSMEs.

Key Measures in the Budget

Agriculture and Food Security	●Promotion of Self-Reliance (Atmanirbharta): Initiatives to boost the production of pulses and oilseeds aim to reduce dependency on imports and enhance food security. ●Agriculture Research and Development: Focused on adapting to climate change, these efforts include setting up large-scale vegetable production clusters. ●Digital Public Infrastructure (DPI): Establishing DPI in agriculture to better cover farmers and their lands, facilitating access to information and resources. ●Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY): Extended for another five years, ensuring food grain availability to the underprivileged.
Employment Generation and Skilling	●Incentives for New Workforce Entrants: A new scheme with a ₹10,000 crore outlay offers incentives for employers and employees, particularly targeting youth entering the formal workforce for the first time. ●Internship and Skilling Initiatives: With a ₹2,000 crore allocation, these programs aim to enhance youth employability in collaboration with state governments and the private sector, reflecting a recommended tripartite compact.
Housing and Infrastructure	●Pradhan Mantri Awas Yojana (PMAY): Significant budget increases for both urban (37%) and rural (70%) housing schemes highlight the government's commitment to housing for all, now in its second phase.
Production-Linked Incentive (PLI) Scheme	●Increased Allocation: A 75% increase in the PLI Scheme budget, particularly for the automotive sector, coupled with adjustments in sectoral custom duties, aims to boost domestic manufacturing and local value addition.
MSMEs and Financing Support	●Term Loans and Credit Assessment: The government plans to facilitate term loans for MSMEs to purchase machinery and equipment without collateral, and enable banks to develop in-house credit assessments. This support extends even during times of economic stress, ensuring uninterrupted credit flow to MSMEs.

Fiscal Discipline and Future Outlook

• Fiscal Deficit Targets: The FY25 budget sets a fiscal deficit target of 4.9% of GDP, a reduction from the interim budget's estimate of 5.1%. This shows a commitment to fiscal consolidation, with a planned reduction to 4.6% in FY26.
• Use of RBI Dividend: The budget strategically utilized a record high dividend of ₹2.1 trillion from the Reserve Bank of India. The funds were split between welfare spending and reducing the fiscal deficit, demonstrating a balanced approach.
• Global Financial Integration: India's domestic bonds are on the verge of inclusion in global bond indices, increasing international scrutiny of the country's fiscal metrics. Adhering to fiscal discipline is crucial for maintaining credibility with global investors and possibly achieving a sovereign rating upgrade in the future.

Conclusion

• The FY25 Union Budget seeks to balance fiscal prudence with inclusive growth initiatives. By focusing on improving the economic foundations, such as employment quality, agriculture, MSMEs, and infrastructure, the government aims to create a more equitable economic landscape. The budget's emphasis on fiscal discipline and strategic use of resources highlights the administration's commitment to sustainable growth and stability, positioning India for stronger economic resilience and potential global financial integration.

ECONOMICS

A CONVOLUTED APPROACH TO JOB CREATION

Source: THE HINDU

Introduction

• The 2024 Budget's approach to job creation, which heavily relies on incentivizing private sector employment through wage subsidies and skill development, is critiqued as being disconnected from the actual economic and employment realities on the ground.

Employment and Economic Growth Link

• Economic Survey's Observation: Employment is crucial for translating economic growth into a better quality of life. However, the connection between economic growth and job creation has weakened over time.
• Jobless Growth: Despite growth in economic output, job creation, particularly in the formal sector, has not kept pace. Manufacturing jobs grew modestly, with significant employment concentrated in just three states (Tamil Nadu, Gujarat, and Maharashtra). Non-agricultural jobs in small enterprises have even declined.

Current Workforce Statistics

• Self-Employment and Low Earnings: Over 57% of the workforce is self-employed with low average earnings, and a significant portion are unpaid workers in household enterprises.
• Agriculture Employment: The proportion of the workforce in agriculture has increased from 44% in 2017-18 to almost 46% in 2022-23, indicating a lack of sufficient non-farm job opportunities.
• Job Creation Need: To accommodate the rising workforce, nearly 78.5 lakh (7.85 million) non-farm jobs need to be created annually until 2030.

Proposed Employment Incentive Schemes

Wage Subsidies

• First-Time Employees: The government will cover the first month’s wage for first-time employees registered with the Employee Provident Fund Organization (EPFO), up to ₹15,000.
• Manufacturing Sector: Wage subsidies will be provided to first-time employees in manufacturing, shared between the employer and the employee.
• Additional Jobs: Employers who create additional jobs will receive a reimbursement of ₹3,000 per month for the EPFO employer contribution for two years.

Skill Development Initiatives

• Industrial Training Institutes (ITIs): 1,000 ITIs will be upgraded with a total outlay of ₹60,000 crore over five years, shared between the Union government, state governments, and CSR funds.
• Prime Minister’s Internship: A 12-month internship offering ₹5,000 per month plus a one-time assistance of ₹6,000 for youth aged 21-24.
• Prime Minister’s Package for Employment and Skilling: A ₹2 lakh crore budget over five years, aiming to benefit 4.1 crore youth and meet the job creation targets.

Critique of the Approach

• Short-Term Nature of Jobs: The incentives may lead to the creation of jobs that are short-lived, lasting only as long as the subsidies. Once the subsidy period ends, employers might not retain these positions, leading to medium-term job losses.
• Potential for Misuse: Incentives based on EPFO enrollment could be misused. Employers might manipulate payrolls and misreport wages to benefit from subsidies, siphoning off public funds without genuinely increasing employment.

Inaccurate GDP Estimates The Economic Survey and Budget assume higher growth rates than what might be realistic. For example, the provisional estimates for 2023-24 show real GDP growth at 8.2%, while nominal growth is 9.6%, implying an inflation rate of 1.4%. However, the Consumer Price Index indicates retail inflation at 5.4%, suggesting that the GDP estimates might not accurately reflect economic conditions.

Alternatives to Supply-Side Incentives

• Expand MGNREGA to Urban Areas: Direct job creation through an expanded Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) to urban areas and increasing the entitlement beyond 100 days could provide more stable employment.
• Public Sector Investment: Increase capital expenditure by profitable Central Public Sector Enterprises (PSEs) in labor-intensive sectors to generate employment directly.

Conclusion

• The 2024 Budget's job creation strategy is criticized for being overly complex and potentially ineffective. It relies heavily on supply-side incentives like wage subsidies and skill development, which may not lead to sustainable job creation. The approach assumes a level of labor demand that may not exist and depends on questionable GDP growth figures. Alternative strategies such as expanding direct job creation programs and increasing public sector investment in labor-intensive sectors might offer more reliable solutions to address India’s unemployment crisis.