Pretty sure Google wasn't working on a social punishment system (ie the Chinese "credit score" that's based on social factors), but a censored search engine, which is still pretty shitty but not nearly as bad as what you claim, unless I missed some big piece of news and am myself mistaken
Dragonfly allegedly is designed to associate searches with a user's phone number, which can be tied to their identity. Since China would have access to this system, it's likely searches for banned topics would be able to impact your social credit, or potentially get you disappeared in the middle of the night.
BTW although having searches on political topics banned explicitly tracked doesn't sound too scary from a pragmatic point of view I doubt they will stop at this point. They probably will analyse whole search histories of people to produce their social portraits so a person interested in whatever unorthodox kind stuff can get penalized too.
