Why Is The Government Scrimping On MGNREGA Budget? CEA Krishnamurthy Subramanian Responds
The rural jobs guarantee scheme, which proved to be an important source of support to the economy, continues to face a cash crunch. The Rs 73,000 crore allocated to the scheme at the start of the financial year has been used up and an additional Rs 10,000 crore promised by the government will likely get used up in clearing existing dues.
With four months left in the financial year, the scheme is likely to need more funding but the government is yet to allocate it.
Why is the government reluctant to increase the allocation to the scheme at a time when the fiscal deficit for the first seven months of the year is only at 36% of the budget estimate?
Chief Economic Adviser Krishnamurthy Subramanian reiterated that the commitment to provide the work demanded under the scheme remains in place. He, however, said India has approached the post-pandemic period differently from the post-global financial crisis period in terms of providing relief.
Subramanian pointed to a number of countries globally which are experiencing a surge in inflation. "Ask the question why. It's textbook macro-economics. If you only pick the Keynesian solution of providing revenue expenditure, you increase demand and create inflation."
India, according to Subramanian, has seen inflation remain at 4.5% on average. This is because the country stayed away from large cash giveaways in the aftermath of the crisis, he argued.
In the immediate aftermath of the Covid crisis, the government opted for food transfers and targeted cash transfers. While cash transfers were limited, in-kind transfers via foodgrains have continued. The budget allocated to MGNREGA was also raised to Rs 1.1 lakh crore in FY21 but cut by 35% to Rs 73,000 crore for FY22. In November, the rural development ministry said the Finance Ministry has allocated another Rs 10,000 crore.
Accounts available on the MGNREGA website shows that total expenditure on the scheme until Dec. 2 stood at Rs 87,845 crore, including overdue payments worth Rs 9,968 crore.
Subramanian argued that in-kind transfers, such as foodgrain, tend to be more targeted. Money in the hands of people can get spent on anything and will have an impact on demand and could spur inflation, he said.
Besides the rural economy is not a point of concern, he argued. "It's the urban poor who have been hurt more by the crisis." This segment of people has been supported via the government's loan guarantee schemes, he said.
"To provide demand stimulus here, we have used guarantees together with lending by microfinance institutions... If you provide a loan with a guarantee, that actually leads to much more targeted interventions."
A far stronger push to demand, particularly via cash transfers, could have generated inflation and, in turn, prompted a quicker reversal in monetary policy support to the economy, said Subramanian.
India has been different from the rest of the world on both demand and supply side. On the demand side, we have done three things primarily—food, which is the essentials, we have given cash transfers to the groups that need and we have given loans with credit guarantees.Krishnamurthy Subramanian, Chief Economic Adviser, Government of India
Understanding Demand Conditions
The Indian economy grew by 8.4% in the quarter ended September and full-year growth is seen at close to 9.5%.
However, concerns persist about consumption demand and whether job and income losses at the bottom end of the pyramid would hurt demand in the medium term. Economists refer to this as the fear of hysteresis, which implies that the impact of a shock persists even after the shock itself abates. In this case, it could be via workers being forced to accept lower wages or staying out of work for an extended period. Or it could occur when a prolonged demand shock turns into a supply shock.
Is that a risk the Indian economy faces?
Subramanian doesn't think so.
He points to the fact that the formal sector has emerged clearly stronger and healthier after the pandemic. While the informal sector has been hurt, it will heal as the economy picks up.
"Hysteresis typically manifests when firms have to sell their assets in order to take care of their liabilities. That typically happens for firms that rely on both capital and labour," Subramanian said. "The informal sector relies far more on labour and less on capital. And because it relies less on capital, the obligations to the formal sector are lower. So the need to sell assets to meet those obligations remains low."
I do think that while the informal sector has been hurt more, as the economy comes back, the memory, or what economists call hysteresis, will be lower.Krishnamurthy Subramanian, Chief Economic Adviser, Government of India