Budget 2023: The inequality problem of India’s growth story
Despite being its last full budget before the general elections in 2024, Narendra Modi’s government is expected to shun populism in favour of fiscal discipline. But the uneven nature of India’s post-pandemic recovery calls for heightened support to the most vulnerable sections of society, experts say.
With a third of the world hovering on the brink of a recession after two pandemic years, India’s economy remains a comparative bright spot in 2023.
GDP targets for the year have been moderated slightly, but India is expected to remain the fastest growing major economy in the world for a second year running. Growth is likely to be in the range of 6-6.5%, which is impressive by any measure.
Additionally, inflation is coming off, energy prices have cooled off, the country continues to receive strong investment flows and consumer spending is inching up. India is also expectedly benefitting from the ‘China-plus-one’ strategy of global manufacturing, with the likes of Apple looking to scale up capacity in the country as it diversifies supply chains away from China.
But the union budget, which will be presented in parliament on Wednesday, will need to focus on making economic expansion in Asia’s third largest economy more broad-based, say experts.
At the recently-concluded World Economic Forum in Davos, the one-line message from Gita Gopinath, deputy managing director at IMF (International Monetary Fund), to politicians was to use “fiscal policy to provide support to the most vulnerable in society”.
Despite impressive headline GDP forecasts, unemployment in India remains high – at over 10% in cities, according to December 2022 data from the Centre for Monitoring the Indian Economy. And inequality has worsened.
Recent findings by Oxfam, the British charity, that India’s top 1% owned 40% of its wealth have been subject to a great deal of scrutiny, with many pointing to flaws in its calculation methodology.
But a raft of other data sets – such as shrinking demand for affordable homes, greater demand for luxury cars vis-vis two wheelers, or for premium consumer goods over cheaper alternatives – points to a K-shaped recovery post pandemic, where the rich have become wealthier, while the poor are worse off.
In many parts of the country’s vast rural hinterland, signs of mounting distress are visible.
The BBC travelled across numerous villages in West Bengal’s Purulia district where people are caught in a political crossfire between the federal and state government. Approximately $330m (£266.5m) in wages under the government’s rural jobs guarantee programme, a crucial social buffer, have been delayed for more than a year as a result, official data shows.
Sundara and Aditya Sardar, a couple who spent four months digging a pond outside their village under the jobs scheme – Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), told the BBC they’d run up debts to pay for food because of the wage delays and taken their son out of school.
Across tribal hamlets, we heard similar stories of hardship.
“The central government has blocked off payments to 10 million workers in West Bengal for over a year. In times of economic distress and high unemployment, this is inhumane and, as the Supreme Court has said in a MGNREGS case ruling on delayed payments, it is forced labour,” said Nikhil Dey, an activist.
These delays, while most acute in West Bengal, aren’t limited to the state alone. In all, the government owes over $500m in unpaid dues to workers under the scheme across the country.
Economist Jean Dreze blames this situation on the government’s bid to contain expenditure across social security schemes and allow the “vicious cycle” of annual under-allocation and delays in wages to continue, particularly for MGNREGS.
“There was a time when the expenditure on the jobs programme had risen to 1% of GDP. It is now less than half a percent. I would be quite happy if it came back to 1% in this budget, with much bigger efforts to curb corruption in the scheme,” said Mr Dreze.
Outlays to the rural jobs scheme shrunk last year and lower spends were budgeted for food and fertiliser subsidies, although supplementary allocations were made to extend the Covid-era emergency support schemes and cushion the impact of global geopolitical shocks.
A balancing act
But given the Modi government’s precarious fiscal position, the finance minister has a tough balancing act to do; between prioritising social protection to the poor and growth-supportive capital expenditure on one hand and reducing the budget deficit on the other.
India’s budgeted fiscal deficit – the gap between what the government earns and spends – is at 6.4%, as opposed to an average of 4-4.5% over the last decade. And with the government’s gross indebtedness doubling over the last four years, subsidies on food and fertilisers could be cut by a quarter, a Reuters poll of economists found. The government has already discontinued a Covid-era free food program.
A widening current account deficit – the difference between what the government earns from exports and spends on imports – poses another significant challenge.
“India’s economy is affected by external demand, sentiment of global investors, and regional trade dynamics. These are not flashing bright green right now,” DBS Group Research chief economist Taimur Baig and data analyst Daisy Sharma said in a recent report.
Demand for Indian exports is likely to falter as the West enters a recession. Meanwhile, tighter financial conditions domestically are expected to keep domestic demand muted. India’s central bank is broadly expected to hike rates further in February before pausing for the rest of the year.
Mr Modi’s government faces formidable economic challenges this year despite India’s outperformance globally. And it will need to undertake continued structural reforms beyond budget announcements to make increasingly scarce money work better.