Marginalising the Marginal: Supply-side Approach in the 2021–22 Budget Will Not Work

The union budget is the biggest single event of the economy in any given year. No other economic event can match it in terms of its impact, except when there are shocks such as a drought or a demonetisation or a pandemic induced lockdown. Those who argue for downsizing the government argue that the budget does not matter since it cannot make much of a difference to the economy. But even they spend considerable time analysing the union budget. Why is that so?

The budget contains the data on revised estimates (RE) for the current year and the budget estimates (BE) for the coming year (the reason the budget is presented). This data enables analysis of three aspects of the economy. First, how the economy has fared in the current year. Second, how has the government tackled the problems experienced in the current year so that they do not persist in the following year? Lastly, it enables the analysis of the likely future impact of policies announced by the government in the budget. 

The Union Budget 2021–22, presented when the economy has experienced its deepest crisis, needs such an analysis more than at any time in the past. The rate of growth of the economy has slumped like never before, unemployment is high, the unorganised sectors, including agriculture have been hurt, investment levels have fallen and consumer sentiment remains low. So, it is imperative to understand how the Budget 2021–22 helps deal with this current crisis?

The finance minister stated that the budget follows the framework of Atmanirbhar Bharat which was announced in May 2020 during the pandemic. It is based on supply-side economics but Kumar (2020c) argues when demand is short, can such a package be the solution to the current problems? The same question can be asked of the Budget 2021–22. While the supply side may enthuse the business community, the real issue is will it solve the problems currently faced by the marginalised sections of the population who have been the hardest hit by the pandemic? Further, will it spur investment, employment and growth?

Budget Formulation Process

A budget is a densely detailed document which even the experts find difficult to decipher. Most analysts look at specific aspects and not the totality of the budget. This gives a limited understanding of the budget since what may be suggested in one part of the budget may be overwhelmed by what is proposed in another part. Thus, while the specificities are important for different sections of the population, so is the totality.

Budget formulation is not a very democratic process. It is subject to intense lobbying by vested interests in society. Discussions on its formulation start in September, five months before the budget is presented. Lobbying and negotiations between the government and the vested interests takes place during this period. The common person has no place in this process. However, towards the end, the finance minister holds consultations with various groups. But by the time these formal consultations take place, the budget is mostly formulated.

This process of budget formulation determines who the gainers and losers will be. While this is always important it is even more crucial in periods of crisis when major sections of the population lose out, like at present, due to the lockdown. This has made the budget for 2021–22 crucial because the country has faced an unprecedented situation in which demand collapsed and supply froze (Kumar 2020a). 

The large unorganised sector of the economy faced a crisis of untold proportions and needed immediate relief. The organised sector and businesses, except those producing essentials, have faced tough challenges. Thus, a vast majority of the people and businesses needed relief, especially those in the unorganised sector, who have little resilience to face a crisis. In fact, the crisis facing the economy is in large part linked to the situation these people are in. If a vast majority of people face unemployment and/or loss of income then demand in the economy will fall short and the recovery from the severe downturn would be difficult. This will have long-term implications.

Reliability of Official Growth Projections

The correct rate of growth of the economy is crucial for formulating the budget for the coming year (2021–22). If it is inaccurate the budgetary figures would not be reliable.

The Ministry of Statistics And Programme Implementation (2021) projects growth in real gross domestic product (GDP) during 2020–21 at -7.7% and nominal GDP growth at -4.2%. The Reserve Bank of India (RBI) in January stated that the economy would contract by 7.5%. Using a nowcasting model (RBI 2020), it projected growth during Q2 of 2020–21 at -8.6% and for Q3 of 2020–21 at +0.1%. So, for the first half of 2020–21 (H1), the decline is projected at -15.7% and in the second half (H2), -0.1%. The implication is that the economy has by January 2021 recovered to its level in January 2020. How reliable are these projections?

Kumar (2017) and Kumar (2020c) have pointed out that the official data on growth rates is in error since it does not independently estimate the contribution of the unorganised sector to GDP. The Ministry of Statistics And Programme Implementation (2021) gives the method used to calculate the advance estimate of GDP. A bare perusal of this document makes clear that the data is largely from the organised sector except for data for agriculture. For instance, it uses, “(i) Index of Industrial Production (IIP) of first 7 months of the financial year, (ii) financial performance of listed companies in the private corporate sector available up to quarter ending September, 2020 …” GST data is used but it is well known that most of this tax is paid by the organised sector. The former finance minister,  Arun Jaitley, said that 5% of the entities pay 95% of the tax.

Another problem is, indicators like IIP are available only for the first seven months of the year and need to be extrapolated for the whole year. The extrapolation is done by using a ratio derived from the past years. Clearly, this would be incorrect when there is a shock to the economy and Ministry of Statistics And Programme Implementation (2021) recognises this when it states, “the usual projection techniques won’t hold good … ” It further states, “Estimates are therefore likely to undergo sharp revisions…”

Since the traditional method is not used, the data for 2020–21 becomes non-comparable with the data for the previous year 2019–20. Thus, the growth rate calculated using non-comparable data becomes unreliable. The difficulty is even greater for quarterly growth data which is what is discussed most of the time. 

Since most data was not collected in Q1 of 2020–21, alternate data was used which makes it non-comparable with the data for Q1 of 2019–20. Also, it is not comparable with the data for Q2 of 2020–21. Hence, the official quarterly growth rates for 2020–21 are in substantial error. This difficulty makes the annual growth estimates even less reliable. Kumar (2020b) points out that since the data for Q1 was not collected it cannot be collected later on and corrections cannot be applied later on. Hence, the errors in the official data for 2020–21 will remain.

The problems with the data being pointed out above also afflict the RBI’s nowcasting model used to estimate growth. RBI (2020) gives the methodology of the estimation and the list of the 27 monthly variables used in the model. As Table 1 shows, most of these variables pertain to the organised sector (like IIP and Purchasing Managers' Index) and only some of them have a link with the unorganised sector (like tractor sales and fuel consumption). But even fuel consumption mostly pertains to the organised sector. Thus, even the RBI projections mostly refer to the organised sector growth and marginalise the impact on the unorganised sector.

Table 1: High-frequency Indicators Used By RBI in Nowcasting 






Domestic air passenger traffic

US Industrial Production

Gross taxes

Automobile sales (total)

Domestic air cargo traffic

Baltic Dry Index

Job Speak Index

Non-oil exports

Port cargo traffic

US Purchasing Managers' Index - Mfg.

Non-food credit

Non-oil non-gold imports

Railway freight

OECD Composite Leading Indicator

Broad Money 

Purchasing Managers' Index - Mfg

Foreign tourist 

US payrolls

Consumer Price Index – non-food

Power supply

Purchasing Managers' Index - Serv


Crude prices (average of Brent, Dubai and WTI)

Tractor sales

Fuel consumption



Cement production



Steel consumption


Source: RBI Bulletin November 2020, pp 25.

The nowcasting model has more problems. It was devised for advanced countries “to predict the present, the very near future and the very recent past” using high-frequency data. The advanced countries do not have a large unorganised sector so, unlike India, they do not face the problem of some sectors going unrepresented in the data. Further, some of the variables used do not seem to be relevant in the Indian context. For instance, under global indices, several pertain to the economic activity in the United States (US). Just one would have been adequate for India, for instance the Organisation for Economic Co-operation and Development (OECD) Composite Leading Indicator. For India, agriculture provides the largest amount of employment and should have been used in some form but is completely missing. Data on the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) could have been used to capture unemployment/employment in the unorganised sector. These omissions suggest that the model has been mechanically used in the Indian context and at best represents the organised sector of the economy. Thus, just as the official Central Statistical Office (CSO) data is erroneous so is the RBI data.

Further, Kumar (2020b) points out that the error in GDP data is even greater since the organised sector is growing at the expense of the unorganised sector with demand shifting from the latter to the former. For instance, demand has been shifting from the brick-and-mortar retail stores to e-commerce and this trend accelerated during the pandemic. So, more the growth of the organised sector, the more the underlying decline in the unorganised sector and greater the error in measuring the growth of the economy using the organised sector data only.

It is further pointed out that this decline in the unorganised sector pre-dates the pandemic and is at the root of the shortage of demand in the economy. That is why even before the pandemic, the official growth rate of GDP had been declining for eight quarters. This aspect is going to further plague the economy as lockdown is eased because the shift in demand has accelerated during the pandemic and inequalities have risen substantially during this period.

It is hard to believe that the economy has almost recovered back to the pre-pandemic level as the official data claims - that growth in 2020–21 H2 will be -0.1%. Major components of the services sector have not yet recovered, as the high frequency data shows. Trade, travel, tourism, media, advertising, education, personal services, etc, are still much below their level in January 2020. Many small and micro businesses are closing down and one in five are not able to pay their equal monthly instalments (EMI) (Kumar 2020c). Demand for work under MGNREGS remains high and reports are that not enough work is being given since the budgets for the scheme have been exhausted (Sharma 2021).

RBI’s Consumer Confidence Index based on the survey in January 2021 was at 55.5, slightly higher than the level in November but way below the 100 mark (RBI 2021). The expectations for a year later were at 117.1 but they change as the year progresses. For instance, in January 2020, the expectations for a year later were 20 points higher and they have been belied by the pandemic. The low level of confidence implies low consumer spending and slow recovery of demand. Finally, investment levels remain below last year’s level because the capacity utilisation which was already low in 2019–20 has fallen further in 2020–21, across most sectors.

For all these reasons, it can be argued that the level of GDP in January 2021 is below its level in January 2020 and will remain lower than its corresponding level in 2019–20 for much of 2021–22. If lucky, the GDP may recover to its level in 2019–20 by the end of 2021 after herd immunity is induced by vaccination and coronavirus is tamed, but these are big ifs.

Of course, due to the low base effect, the rate of growth for 2021–22 will be high—in double digits—as the government claims but that should not be confused with the level of GDP. 

Growth Projections Key to Budget Formulation

The above points to the errors in the official rate of growth of the economy which underlies the formulation of the budget for 2021–22. These may be listed as:

First, the current year’s (2020–21) revised estimates go wrong since most of the data used is available for seven to 10 months only and has to be projected for the balance of the year. For example, we have noted this problem earlier with regard to the IIP data. The same is true for the budget data for which the traditional method of projection breaks down after any shock, like a lockdown. This will induce errors in the revised estimates for 2020–21.

Second, if the data for the first seven to 10 months of the current year is incorrectly estimated, as pointed out the previous section, the revised estimates will have further errors. 

Third, if the revised estimates are incorrect then the projections for the next year (2021–22), based on them, would also be incorrect. 

Finally, if the rate of growth for the next year (2021–22) is incorrect, then the budget estimates will have further errors.

The above arguments are borne out by the data for the budgets for the last two years given in Table 2. The gap between the revised estimate and the budget estimates for total revenue and fiscal deficit has grown over the years. Further, the deviation between revised estimates and the actual has again increased. For instance, the revenue estimate for 2019–20 was first revised by 5.76% and then again by 8.87% in the actual. The fiscal deficit was first revised by 8.95% and then this deviated by 21.77% in the actual. 

Table 2: Key Budgetary Figures (Rs Lakh Crore)





Revenue Receipts









% deviation








% deviation




Total Expenditures









% deviation








% deviation




Fiscal Deficit









% deviation








% deviation













% deviation








% deviation




Source: Budget at a Glance, Various Years and Author's own calculations

Table 2 indicates that the problem of estimates going wrong has aggravated in the last two years. The actual has been deviating from revised estimates which have deviated from the budget estimates. Thus, the deviation between the actual and the budget estimate was large. From this, it may be inferred that due to the shock, the deviations in the budget data for both 2020–21 and 2021–22 may be substantially more than in normal circumstances. Be that as it may, let us analyse the budget data.

Budget 2021–22: Some Key Macro Features

The following aspects of the budget for 2021–22 stand out:

  1. The total expenditure estimated at Rs 34.83 lakh crore is 0.96% more than the RE of Rs 34.50 lakh crore for 2020–21.
  2. The fiscal deficit is slated to come down to 6.8% from RE of 9.5% in 2020–21.
  3. The food subsidy is slated to fall from RE of 2020–21 of Rs 4,22,618 crore to Rs 2,42,836 crore and fertiliser subsidy is set to fall from RE of 2020–21 of Rs 1,33,947 crore to Rs 79,530 crore.  
  4. Tax revenue net to the centre is expected to go up by 14.87% over RE of 2020–21.
  5. Disinvestment proceeds are slated to increase to Rs 1.75 lakh crore over RE of Rs 32,000 crore for 2020–21.
  6. Capital account expenditures are to rise by 26.2% from Rs 4.39 lakh crore in RE of 2020–21 to Rs 5.54 lakh crore.
  7. But, total capital expenditure of the government, including expenditure by railways and the internal and extra budgetary resources (IEBR), is set to rise by only 4.8%, from Rs 10.85 lakh crore in RE of 2020–21 to Rs 11.37 lakh crore.
  8. Table 3 shows that the allocations for major schemes that cater to the marginalised are reduced. Like the MGNREGS, National Social Assistance Programme and Pradhan Mantri Kisan Samman Yojna.
  9. Table 3 shows that allocation to agriculture and allied activities and education are set to fall compared to BE while health and rural development are set to fall from RE. Comparisons with both BE and RE are important since one reflects the intention while the second represents what was required.
  10. Table 3 shows the major items where the allocations are higher. Finance is to rise from RE of Rs 50,566 crore to Rs 91,916 crore; interest is to rise from RE of Rs 6,92,900 crore to Rs 8,09,701 crore; transfer to states is to rise from RE of Rs 2,07,001 crore to Rs 2,93,302 and transport is to rise from RE of Rs 2,18,622 crore to Rs 2,33,083 crore.

Table 3: Expenditures on Some Major Items (Rs Crore)








Budget Estimates

Revised Estimates

Budget Estimates

Significant items of decrease or stagnancy






Agriculture and allied activities  















Rural development





Significant schemes for the marginalised facing cuts (Either compared to BE or RE)






Umbrella ICDS     





National Social Assistance Programme   





Pradhan Mantri Awas Yojana      





Pradhan Mantri Kisan Samman Yojana       





Direct Benefit Transfer–LPG     





Significant items of increase












Transfer to states










Source: Budget at a Glance.

Supply-side Incentives to Businesses

It was expected that due to shortfall in both tax and non-tax revenues, there would be a shortage of resources while expenditures were set to rise to take care of the stress caused by the pandemic. Hence, the fiscal deficit was set to rise sharply. It was expected that the government would increase taxes on the well-off in society who were doing well due to the sharp rise in the stock market capitalisation. The rich were anticipating the imposition of a wealth tax or a cess.

Nothing like this happened and this was taken as a positive signal to businesses. The markets discounted the negative sentiment due to the limit of Rs 2.5 lakh on tax-free income from provident funds. The stock market soared to record levels even though many components of the economy are still below their levels in February 2020. 

Further, the announcement of privatisation of most public sector units (PSUs) was another pro-business signal. This is likely to result in availability of cheap public assets to the favoured businesses. As Kalecki (1971) points out privatisation signals the increasing monopoly power of businesses and their capacity to fix prices and make extra profits.

The announcement of increase in budgetary capital expenditures (though not in reality as pointed out below) is also being read as increasing demand in the economy and increased business opportunity for the private sector. The finance minister and the Prime Minister in their parliamentary speeches have squarely favoured the private sector (against the public sector) so that the expectation is that businesses can expect continued support.

Kalecki (1971) has argued that when the private sector becomes dominant in the economy then every downturn is used to extract concessions and that shifts national income in favour of profits. While the intention of the government is clear, is this the solution to the current economic problems, especially for the unorganised sector?

Analysis of the Key Macro Features

The arguments in the preceding sections enable analysis of the impact of the Budget 2021–22 on key macro variables.


The implication of all the pluses and minuses listed in Table 3 is that the schemes that could have immediately boosted employment and incomes of the marginalised sections (items 7 and 8) have been largely curtailed while transfers and expenditures on capital intensive items (in item 9) have risen. The latter will generate little new employment directly and not immediately. Hence, there will be little immediate boost to demand.


  • The increase in capital account expenditure in the budget should net out disinvestment. The latter is the capital liquidated and no more owned by the government so its capital ownership will rise by the net amount only. Thus, the net capital increase of the government will go from RE for 2020–21 of Rs 4,07,163 crore to Rs 3,79,236 crore for 2021–22. That is, there will be a fall.
  • Similarly, the total capital expenditure of the government including the expenditure by railways and the IEBR is set to fall from 2020–21 RE of Rs 10,52,651 crore to Rs 9,62,067 crore. This further contradicts the government’s claim that capital expenditures will rise and boost the economy.
  • Further, it has been pointed out by Garg (2021) that the government has fudged the data on the Railways for 2020–21 by showing revenue account items as capital account items. The railways have incurred big losses since it had to shut operations during a large part of the year and passenger traffic is still down. For this, the centre has provided support which should be a revenue account item but it is listed under a capital account. This transfer (Rs 79,238 crore) to the Railways will not generate any new employment or growth. It is also pointed out that Rs 12,000 crore transfer to the states is also mis-specified as centre’s capital expenditure. Thus, a total of Rs 91,238 crore should also be netted out of the capital account items for 2020–21.
  • Thus, the capital expenditure by the central government and the larger public sector in 2020–21 is to be Rs 3,15,925 crore and Rs 9,61,413 crore, respectively, and for 2021–22, Rs 3,79,236 crore and Rs 9,62,067 crore. In effect, over all, there is little increase in capital expenditures and in real terms it will fall. As such, this item will not spur growth in 2021–22.

Fiscal Deficit

  • The fiscal deficit of 9.5% of GDP in RE of 2020–21 has been bloated due to the sudden liquidation of some off-balance sheet items, especially, the Food Corporation of India’s (FCI) loans from the National Small Saving Fund. On 31 January  2021, they stood at Rs 3.25 lakh crore (Food Corporation of India 2021). That is why the food subsidy jumped from Rs 1,16 lakh crore in BE of 2020–21 to Rs 4,23 lakh crore in RE. Similarly, the fertiliser subsidies jumped from Rs 71,309 crore to Rs 1.34 lakh crore. While this step is welcome, since it brings about greater transparency in the budget, these are pure transfers which will not result in an increase in demand in the economy. Thus, an amount of Rs 3.25 lakh crore paid to FCI loans plus the Rs 63,000  crore for fertiliser subsidy which add up to Rs 3.88 lakh crore needs to be subtracted from the fiscal deficit. So, the effective fiscal deficit will decrease by about 2% and it will be 7.6% for 2020–21.
  • The transfers to the Railways and the above-mentioned liquidation of the past borrowings for food and fertiliser subsidies total about Rs 4.8 lakh crore in 2020–21. If these are subtracted from the total expenditure in RE of 2020–21, there is no effective increase from BE to RE. 
  • The implication also is that the increase in the fiscal deficit in 2020–21 from BE of 3.5% to RE of 9.5% is largely due to the decline in revenue collections consequent to the fall in output due to the lockdown.

Impact on Demand

  • Since total expenditures hardly rose between BE and RE for 2020–21, the government’s actions to boost demand in 2020–21 were negligible.
  • In fact, the announcement of additional budgetary allocation of approximately Rs 2 lakh crore under Atmanirbhar Bharat is not much in evidence, except in the case of the MGNREGS. As argued in Kumar (2020c), most of the announcements were earlier schemes or those already part of the budget. 
  • If the total expenditure for 2020–21 RE was effectively less, there is a step up in total expenditure from 2020–21 to 2021–22 of about Rs 4.5 lakh crore. This would imply an effective increase of 15% over 2020–21. Thus, there should be a boost to demand and the growth rate.
  • How much increase in demand would occur would depend on the kind of expenditures? As pointed out above in 1), 2) and 3) and the discussion on investment, in 2021–22 capital account items and the social sector expenditures are less compared to the RE of 2020–21. Further as Table 3 shows, some of the increases like interest payment are transfers and will not generate demand. Thus, the impact of the 15% increase in expenditure in 2021–22 on demand generation, growth and employment would be marginal. 
  • This marginal increase in demand would be inadequate to overcome the decline in demand from the private sector and the economy’s recovery to its level in 2019–20 would be slowed down. Consequently, revenue will be less and if the expenditure is maintained at the planned level, the fiscal deficit will rise. Usually, to check the rising deficit, it is capital account and social sectors that face cuts and that would further slow the recovery of the economy. 

Marginalisation of the Unorganised Sector

The above discussions help understand the impact of the Budget 2021–22 on the unorganised sector.

  1. Some crucial schemes which provide succor to the unorganised sector have been curtailed (Table 3) in real terms. In these times when this sector has lost a substantial amount of employment and income, public goods provision, income support and employment generation should have been sharply increased and not curtailed compared to 2020–21.
  2. The government’s repeated claim based on high frequency data, largely from the organised sector, that the economy has recovered is marginalising the unorganised sector. That is why the government is not taking steps to revive the economy more strongly. 
  3. For example, the government points to the increase in goods and services tax (GST) collections since September 2020 (over 2019–20) as a sign of pick-up of the economy. But, major contributors to GST (travel, tourism, hotels, restaurants, etc) are still way below their levels in 2019. So, the growth in GST is not due to the economy having surpassed the level in 2019 but for other reasons. These include  (i) some sectors contributing more to GST, (ii) increased collection due to changes in rules, (iii) figures given are gross and not net, and (iv) businesses have complained that they have not been refunded their input credit. 
  4. GST is collected by businesses (though finally paid by consumers) on their production and the corporation tax is on profits, again linked to production. So, changes in collections of both these taxes should have been similar. But the decline of corporation tax is 34.5% from BE to RE while that of GST is by 25.4%. 
  5. Further, GST is mostly collected from the organised sectors so its growth does not represent the growth of the unorganised sector or of the overall economy.
  6. Finally, the increase in GST collections when the unorganised sector has yet to recover to its level in 2019–20, reflects the marginalisation of the unorganised sector.


Union Budget 2021–22 was expected to help revive the economy from the slump it was in 2020–21 due to the pandemic and the lockdown. So, it was expected that the budget would increase real expenditures to revive demand by increasing allocations substantially to capital items, social sectors and transfer of incomes to the poor and those who lost employment. The paper points out that not only is this not in evidence, but key budgetary data also gives a misleading picture and needs to be reassessed (refer to Table 4).

Table 4: Re-estimating Some Key Numbers for Budget 2020–21 and 2021–22 (Rs Lakh Crore)


2020-21 2021-22


Budget Estimate

Revised Estimate

Re-estimated Revised Estimate

Budget Estimate

Re-estimated Revised Estimate

Total expenditures






Total capital expenditures






Capital expenditure of the government






Centre’s fiscal deficit (% of GDP)






Notes: Re-estimation done as explained in the text.

For instance, the increase in expenditure in 2020–21 (RE compared to BE) is misleading because effectively there is hardly any increase. The claimed increase in capital account expenditure from 2020–21 to 2021–22 is also deceptive. The same is true for the fiscal deficit for 2020–21.

Thus, the government provided little stimulus in 2020–21 when it was needed the most and the stimulus in 2021–22 is weak once the data is reassessed. The paper points out that the problems begin with the government’s incorrect assessment of the growth of the economy in 2020–21 which is based substantially on the growth of the organised sector and does not factor in the decline in most of the unorganised sector. It is argued that if incorrect growth figures are used in the formulation of the budget, substantial errors would creep in as has happened in the past three years.

Further, it is pointed out that the budget is based on the framework of the Atmanirbhar Bharat Scheme which propagates the supply side, that it, increased incentives to businesses. So, privatisation of most of the public sector, monetisation of public sector assets, etc, are being accelerated while support to the poor is curtailed rather than being sharply increased. The government is assuming that this would spur investment by the private sector and foreign capital.
The government’s intention became clear when the Prime Minister argued that the private sector needs to be encouraged since it is the wealth creator, as if the public sector has not done so since the 1950s. The budget has led to a speculative boom in the stock markets in spite of the economy remaining much below its level in January 2020. This bubble can burst any time there is another shock. For the present, the paper wealth of the super-rich has increased dramatically, even though the economy has yet to recover and the unorganised sector continues to suffer. 

The stock market rise will not spur more investment in the real economy as long as demand remains short, as indicated by the poor capacity utilisation in much of the economy and low level of consumer confidence. In fact, it can only result in diversion of investment from productive to speculative channels. In brief, the supply-side budget while not resolving the economy’s problems will further marginalise the marginals. 

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