The Union Budget for the year 2022-23 presented by Finance Minister Nirmala Sitharaman has to viewed in the context in which it has been presented i.e. after a year where COVID Wave II and III struck India and indeed the world within the space of the year i.e. 2021-22 with the former being far more severe than the first wave. In itself, these developments should have gravely impacted the Budget presented a year ago just as Wave I had impacted the Budget for 2019-20. And yet inspite of the Central Government spending an additional two lakh crores (the bulk of it being food transfers to the poor during Wave II) in the 2021-22 fiscal over and above what was budgeted for, the fiscal deficit of the Union government was 6.9% of the GDP as opposed to the budget estimate of 6.8%. This was possible because of a surge in revenues that was the result of the strong recovery of the economy in spite of Wave II and III.
This development itself should lay to rest the credibility of the figures as set forth in the current budget as well as the strength of the recovery of the Economy. However, it has not which has to do more with the political positions taken by certain observers rather than economic data. The most striking item in the Union Budget 2022-23 is the allocation of Rs 7.2 lakh crores to capital expenditure (capex) as compared to the revised estimate for 2021-22 which stands at Rs 6.02 lakh crore rupees. With MNREGA and other grants in aid for the creation of capital assets, then the projected effective capex exceeds 10.5 lakh crores substantially more than revised estimates of Rs 8.4 lakh crores for 2021-22. Furthermore, if the capital spending of the Public Sector Enterprises is considered the figures are Rs 12.19 lakh crores compared to the revised estimates of Rs 11 lakh crores. This itself should not have been a matter of debate. But some observers have dismissed the capex figures budget by claiming that capex entries like the one lakh crore interest free loan to the States will crowd out their capex and the capex amount budgeted for NHAI will not be supplemented by additional borrowing as it has been previously leading to no net increase in capex spend where NHAI is concerned. The first contention is clearly speculative and stated without any reason given. As for the second, the observers clearly are not consistent with the lens with which they have viewed the previous budget in the sense that capex of Rs 50,000 crores spent on account of Air India was not strictly for new capital creation.
Thus, the proportion of capex in this budget out of total expenditure is higher no matter what definitions and measures are chosen. Secondly, the quality and nature of government expenditure is as important as its quantum. This is important given the dual role of capex. In the short run it creates demand. In the long run it enhances productive capacity of the economy. It does so by increasing profitability of private investment, thus crowding in private investment which leads to income and employment growth. Rising tax revenues from this rising income pays for capex in the long run. An income tax cut/transfer payments or an increase in revenue expenditure may increase demand in the short run but the revenue foregone or the extra spending increases government debt which has to be paid off in the future. Indeed, a study by Sukanya Bose for NIPFP shows that for a developing country like India the former is clearly a more prudent option.
However, for increased capex to lead to the desired outcome, i.e. greater private investment, greater production of goods and services and greater employment, much more needs to be done. It must be kept in mind that actual economic activity is carried out in the States and therefore States must step up to establish an enabling environment where the regulatory framework as well as local infrastructure complements Central Government actions which draws in private investment. It is in this context that lower capex spending by most of the States (UP being a notable exception) in the current financial year is cause for concern. The combined capex of the States often exceeds that of the Central Government. It is likely given fears of revenue shortfall, States may have deferred capex spending. There are two silver linings here: one that States tend to boost capex spending in the last quarter when there is greater clarity on tax revenues and the other, the afore mentioned provision for a one lakh crore interest free loan payable over a period of 50 years which has been targeted by some critics.
But what is striking about this budget is that it is a template for the next 25 years that commences from this year ie Azadi ka Amrut Mahotsav. As the Economic Survey points out flexibility is a key ingredient to policy making in an environment in flux. Thus, we have seen the Government avoid the “Waterfall” approach where plans are made in detail and cast in stone in the last two years and choose the “Agile” approach where information about new developments are processed and if need be, acted upon.
Thus, the initiation and subsequent additions to the Performance Linked Incentive (PLI) schemes to boost manufacturing in select sectors when the need arose and did not wait for the budget. Equally important many steps which are more in the nature of policy decisions rather than tax or expenditure proposals have found mention in the budget. The Budget’s thrust on digital and financial inclusion cannot be overstated. This of course has met with disapproval in some quarters who have found the refrain of “digital” to be annoying and out of place in a developing economy. This is extremely surprising.
Our current digital architecture with Jan Dhan-Aadhaar-Mobile (JAM) trinity as one of its components enabled the government to transfer money to tens of millions of vulnerable families during COVID in a remarkable short period of time far more efficiently and quickly than any other country. Thus, the announcement in the budget about the bringing in of 1.5 lakh Post Offices in the banking system through the core banking system brings financial inclusion to entire rural India, can only be described as momentous as are the concurrent measures taken to spread of OFC to all villages bridges the digital divide.
In a remarkable turnaround of events, banks have pared down their NPAs considerably just as corporate India has cleaned up its balance sheets. Thus, the ability for banks to lend and firms to borrow is higher than ever before. What is needed is action to boost the growing willingness of both bank and firms so that an investment cycle is initiated. In the same vein the Economic Survey talks about the dramatic rise and spread of start-ups in India. The next logical step would be the transformation of at least some of these start-ups into large-scale entities. However, for this to happen, the States have to move proactively on various the ease of doing business parameters be it facilitating land acquisition by entrepreneurs or the provision of infrastructural inputs like power and water. It is only then that the triple requirement for investment i.e. access to credit on reasonable terms, convenient land and an efficient logistics system will be achieved. If India’s start-up segment starts to take advantage of this trinity, India could potentially see not just a boom in investment, it will witness investment going into a host of sunrise industries where she is not dragged into a bruising battle fought on the basis of costs, but one where she caters to niche markets, commands a premium price and generates well paying jobs. For that skilling our workforce is important where the bulk of the responsibility lies with the States.
This budget is also remarkable in the sense that for the first time many commentators have expressed the view that the Government has considerably understated its projected revenues in the budget. The government has responded by saying that given quite a few imponderables i.e. geopolitical developments, oil price movements, potential COVID waves, it is better to err on the side of caution. Thus, one can be reasonably be sure that previous budgetary figures will hold out when the next budget is presented. India has been unique in the way it initiated measures for the post-COVID recovery. It preferred to rely more on supply side measures like credit extension than government expenditure thus conserving fiscal space for the future budgets. In using this fiscal space preference has been shown to creating an enabling environment conducive to investment and employment over populist handouts and tax breaks which goes to enhances the credibility of the budget presented. In a world still grappling with COVID this is truly remarkable.
(The author is Professor of Economics, University of Jammu and a well-known expert on public policy. The views expressed are his own)
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