Reducing social spending right now is a dangerous bet

A week before the presentation of the Union budget, the Chairman of Hindustan Unilever (HUL) asked the Minister of Finance (FM) to plan a Mahatma Gandhi-like National Rural Employment Guarantee Scheme for the urban poor. He said personal consumption, which makes up nearly two-thirds of India’s economy, has been hit hard and programs like MGNREGA should be scaled up and expanded until consumption fully recovers.

This is a stunning reversal of opinion on MGNREGA, which was derided just a decade ago by the private sector, political commentators and then Chief Minister Narendra Modi as a ‘handout’ for the poor that would make them lazy and indolent.

Ironically, the economic study of 2021-22 proudly states that MGNREGA has provided a safety net for over 110 million poor Indians. As a reminder, all publicly traded companies and unicorn start-ups combined employ only seven million people.
But, in reality, more than 110 million would have depended on MGNREGA this year, if the program had not run out of money after just six months in the current fiscal year. Demand for work under MGNREGA, which is by definition an unemployment insurance scheme for people in dire straits, is at record highs and apparently many have been turned away due to lack of funds.

In this context, the FM introduced a new economic philosophy in the budget that moves away from direct government social assistance for the needy towards indirect economic impact. Denying expectations of an extended and expanded MGNREGA, FM instead cut the budget for the program and reallocated it to government capital expenditure.

To be clear, lowering the demand for MGNREGA should be our primary economic goal as a nation. It is a demand-driven program and if people are able to find better quality jobs than working for minimum wage, the demand for MGNREGA and therefore spending will also be lower. But dismissing people for lack of funds and artificially suppressing the demand of MGNREGA does not suit a democratically elected government.

The idea that government should step in when private investment is lukewarm and demand is lackluster in an economy is sound and well-established economic theory. In itself, embarking on a program of productive public investment to stimulate economic activity, stimulate demand and catalyze private investment is a laudable goal. The question is: was it right to cut MGNREGA’s spending to fund government investments in this perilous time? And the natural corollary question will be: how else could such a government investment program have been funded?

The Union Government plans to spend an additional Rs 2.5 crore on capital expenditure next year compared to the current year, including Rs 1 crore in loans to states exclusively for expenditure of investment. Sixty percent of this additional investment amount is expected to come from a reduction in food (ration), fertilizer, fuel subsidies and MGNREGA.

The government’s fundamental premise is that we are past the pandemic blues and next year will be a normal year. Extra food grains given during the pandemic can be withdrawn and food subsidies can be reduced by Rs 80,000 crore is believed. Similarly, the government seems to believe that the demand for MGNREGA will decrease next year and has reduced its allocation by around Rs 30,000 crore. The government’s belief that next year will be a “business as usual” pre-pandemic year is a dangerous gamble.

It is important to remember that in September 2019, outside of the budget cycle, there was a sudden announcement of a dramatic reduction in corporate tax rates. As a result, of the more than nine lakh companies that filed tax returns last year, the top 433 companies with profits above Rs 500 crore paid taxes at the effective rate of 20%, while at in fiscal year 2019, these companies paid an effective tax rate. by 27 percent.

The profits of these top 400 companies have doubled and their market value has tripled since 2019. But the total number of people employed by these companies has remained the same. To put it simply, corporate tax cuts have so far cost the government Rs 3 lakh crore (Rs 1.5 lakh crore per year), they have doubled corporate profits, but created no new job.

Since the government believes that next year will be a normal year like 2019, the corporate tax rate could have been reduced to the 2019 rate. This could have generated at least an additional Rs 1 lakh crore in tax revenue, probably more , which could have been used to increase capital expenditure without the need to reduce welfare.

There would have been no economic or social repercussions of this decision since these companies did not increase their investments or create jobs after the tax cuts and they were used to paying taxes anyway tax rate. Similarly, with booming stock markets and massive increases in the capital wealth of the few, an increase in securities trading and capital gains taxes could have yielded at least another Rs 50,000 crore, to be used to increase capital expenditure. India’s capital gains and corporate tax rates are among the lowest in the world, and have yielded no ‘dividend’ in terms of investment or jobs for people. There was a clear and justified rationale for boosting government investment spending by raising corporate and capital gains tax rates and not cutting social spending at such a precarious time for the economy.

Increasing public investment to stimulate economic activity is in principle a good philosophy. Reducing MGNREGA expenditures is an optimal objective but one that must be achieved naturally and not forcefully. Reducing social spending to finance investment spending in the hope of “falling off” economic benefit is a dangerous bet at the present time. Especially, when there were other, more prudent ways to raise funds by increasing progressive direct taxes on large corporations without deleterious impact. For the good of the nation, I sincerely hope that the dangerous bet of the Modi government to finance public investments by reducing safety net allocations will pay off, although I remain skeptical.

This column first appeared in the print edition of February 12, 2022 under the title “At the expense of the poorest”. Chakravarty is a political economist and chairman of Congress party data analysis