Reducing welfare spending right now is a dangerous gamble

News: As the Indian economy is badly hit, welfare schemes like MGNREGA will help people to provide the safety net. There have been demands to launch the National Rural Employment Guarantee Scheme-type programme for the urban poor.

How there is a shift in government policy in welfare programmes?

Economic Survey of 2021-22 states that MGNREGA has provided a safety net to more than 110 million poor Indians. On the other hand, all the companies listed in the stock exchange and unicorn start-ups, employ only 7 million people.

But, it has been noticed that the demand under MGNREGA is increasing and many were turned away due to lack of funds. Despite the increase in demands, this budget announced a shift from direct welfare assistance to trickle-down economic philosophy. Consequently, the government cut the MGNREGA budget and re-allocated that for capital expenditure.

What is the present policy on which the government is working?

The government is stimulating private investment by boosting government expenditure. Government plans to spend additional Rs. 2.5 Lakh crore in capital expenditure next year, including Rs 1 lakh crore as loans to states exclusively for capital expenditure. 60% of this amount is expected to come from a reduction in food, fertilizer, food subsidies, and MGNREGA.

As the pandemic recedes, Food subsidies can be cut by 80,000 crores. The government expects MGNREGA demand to taper down, so its allocation has been cut by Rs. 30,000 crores.

What should the government do?

First, In September 2019, the Government announced a reduction in corporate tax rates. Due to which, the top 433 companies with profits greater than Rs 500 crore paid taxes at an effective rate of 20%, while in FY 2019 these companies paid an effective tax rate of 27%.

Instead of an increase in the profit and market value, these companies did not create any new jobs. So, the government should revert the corporate tax rate to the 2019 rate. 

Second, India’s capital gains and corporate tax rates are among the lowest in the world. With the stock market boom, an increase in a securities transaction and capital gains taxes would affect additional Rs. 50,000 crore. Changing the corporate tax rate would help the government to generate an additional Rs 1 lakh crore in tax revenues, which can be used for increased capital expenditure without the need to cut down on welfare.

Source: This post is based on the article “Reducing welfare spending right now is a dangerous gamble” published in the Indian Express on 12th February 2022.