In this article, the second of the three Es that I referred to at the start of the year, I write about the Indian economy in the light of the Indian budget that was presented recently. The much-anticipated Indian Union Budget of 2022 has come and gone without any fanfare, nor any major controversy.
This was not how it was meant to be. After all, five states go to elections in a few days, with UP being the biggest one of all. To be honest, I was expecting a budget full of election-time sops especially since there weren’t any at the time of the deadly second wave of Covid from March to May 2021. And I agreed with Swaminathan Aiyar when he wrote in his Times of India Sunday column that it would be a political budget more than anything else. After the Economic Survey was released, though, he wrote in The Economic Times that the budget could be a populist, political budget and one that increases capex spending since the survey indicated that there was fiscal space for the government to spend more and boost growth.
Well, people like me have been proven wrong. The Finance Minister, Nirmala Sitaraman, must be congratulated for having produced a budget that is not in the least populist, and is grounded in the reality that while India is growing faster than many economies around the world, the Covid threat remains and there are vulnerable sectors as well as promising ones that need all the help they can get.
Unfortunately, the vulnerable sectors as well as those sections of society have been forgotten in this year’s budget. And promising areas such as start-ups and unicorns, new manufacturing enterprises as well as green technology have received incentives to boost growth. At least as far as the budget speech is concerned. There was no mention of any welfare scheme spending being increased to provide greater economic relief to the poor, especially in rural areas. This, when recent corporate earnings have shown us that rural demand is weak – because of high unemployment and high inflation – and that more government assistance is required.
Instead, there were incentives to help new start-ups, sunrise sectors and also new manufacturing enterprises that begin operations under the government’s new PLI (Production-linked Incentives) scheme. Long term capital gains tax has also been capped at 15% for all types of capital gains transactions, including in unlisted companies and start-ups. This too is to benefit the unicorns which have been attracting a lot of investment and been doing very well in the past couple of years. As many of these start-ups are from Tier II and Tier III cities and towns, they do need to be encouraged and assisted.
However, at the same time, it will also benefit wealthy investors, which is why the stock market was cheering and celebrating the budget, with approximately a 1.5% gain on the main indices on budget day and over 1% gain on the following day. Meanwhile, bond markets must have got the jitters, seeing the government’s gross borrowing plan for FY23 at close to Rs 15 lakh crores, when they might have been expecting something closer to last year’s Rs 12 lakh crores. The jitters even prevented the media from reporting on it, when reactions of bond markets are key to the government’s borrowing and the cost of capital.
The highlight of this year’s budget is government capital expenditure of Rs 7.5 lakh crores (Rs 7.5 trillion) to be undertaken in FY23, when compared to last year’s capex of Rs.5.5 lakh crores, which makes effective capex of Rs. 10.7 lakh crore. The thrust of this year’s capex is on infrastructure, and almost all of it going on building roads and highways, and a Rs 48,000 crore boost to affordable housing. This on top of huge spending on NHAI last year as well: last year’s budget estimates were at Rs 57,350 crores, while the revised estimates are for Rs.65,060 crores. This year, the budget estimates are already at Rs.134,015 crores.
The government justifies this spend by saying that it will create thousands of jobs when last year itself, I had pointed out in a blog post that infrastructure projects don’t create jobs immediately. If they had, why would we still be facing such high unemployment, including in rural areas?
Which brings me to the Murphy’s Law of budget planning, or of politics: If a mistake works, repeat it for best results. We wrongly assume that last year was a great year for the Indian economy when, in fact, it was largely the result of a base effect from the previous year. And then also claim that India doesn’t suffer as high an inflation as western economies because we didn’t pursue demand boosting measures. This, when the allocation for MNREGA was already higher last year than in 2020, and had to be boosted mid-2021 because the second wave of Covid dealt a huge blow to the economy, especially the rural economy. Last year’s budget estimates for MNREGA were at Rs 73,000 crores, while revised estimates are for Rs 98,000 crores. The Prime Minister also had to announce an increase in the amount of free food-grain distribution through PDS mid-year, to help the poor tide over the second wave of Covid.
To present this budget as a continuation of last year’s is a fallacy, since 2022-23 will not be 2021-22. There is an unfinished agenda, for sure, in containing and controlling the pandemic. Other than that, the situation on the ground is quite different from the previous year. For one thing, the base effect is wearing off and we should be prepared for a reversal of it, when reading economic data. There is going to be a tapering off of stimulus and liquidity as well as an increase in interest rates in order to tackle inflation. Also, right now there is evidence of consumption demand weakening in urban and rural India, not least because of high inflation. And this time, food inflation too is much higher, which adversely affects the poor the most since it constitutes a larger part of their consumption basket. All of it is not “imported” inflation, as many seem to be suggesting, and even if it is, how is the government planning to tackle falling demand as a result of it?
I am not arguing for a reduction in taxes, in order to boost demand; on the contrary, I had already argued for a higher tax on the wealthy as well as a reversal of corporate tax cuts at the start of the pandemic as a temporary 2-3-year measure.
The greatest challenge facing the Indian government today is how to boost demand, without stoking inflation. And the budget doesn’t indicate how it plans to deal with that; on the contrary, as usual the government has resorted to supply side economics to provide the solution when it should be amply clear by now that their policies from 2016 onwards have only led to an economic slowdown. And that was well before the pandemic.
The logic of increasing spends on road-building by 2.5 times, and at the same time not increasing spends significantly on drinking water, healthcare and education is as yet unclear to me. Spending on each of these core schemes were reduced by Rs 3,000 to Rs 5,000 crores according to revised estimates for FY 22. And spending on the Direct Benefit of LPG (often touted as one of the government’s big pro-poor and pro-women policies) was a quarter of budget estimates at Rs 3400 crores last year, with this year’s budget estimates at one third of last year’s budget estimates, at Rs 4,000 crores. What happened – were rural households suddenly ordering in, via Swiggy?!
And while MNREGA has received a similar allocation as last year – of Rs. 73,000 crores – PM KISAN has received a higher allocation of Rs 68,000 crores in this year’s budget estimates.
The point of mentioning all this is to stress on the need to help the poorer and more vulnerable sections of society, while encouraging India’s new unicorns and corporate entities to invest and innovate. Consumption demand is key to economic recovery and growth. And there might be ways to improve this without aggravating inflation; it can be achieved by improving delivery systems. For example, greater distribution of foodgrains to the poor would be less inflationary than increasing cash handouts or increasing MSP of agricultural products. Last year, food and fertilizer subsidies increased substantially in the revised estimates over the budget estimates and this year might require similar measures. Indeed, the budget seems to provide for amounts midway between last year’s budget estimates and the revised estimates. The same ought to be done for LPG for poor households.
Similarly for healthcare and education, the effort should be to improve delivery mechanisms to make life easier for the poor, without necessarily depending only on cash transfers. Improving efficiencies and incentivizing achievement of targets. For example, door-to-door testing and vaccination programmes in India’s villages should be undertaken on a war footing, where not already attempted. This is best managed at the local panchayat level.
No one is expecting details of these kinds of measures in a budget speech, but the intent itself seemed to be lacking. When the government increases customs duty on umbrellas (supposedly because many are imports from China!) and relaxes them on diamonds and the diamond trade, it tells you which way the policies will tilt. Instead, there was a lot of emphasis on digital education providing a solution to those who had lost out on two years of education, including a TV in every classroom! How many of the poor even in Indian cities have access to digital technology, and where is the uninterrupted power supply and connectivity for it to work in rural areas? We know of thousands of people in Indian villages who couldn’t authenticate their Aadhar number due to lack of connectivity and therefore starved to death.
In fact, the budget speech seemed to be going overboard on the digital dimension, whether it was digital education or digital payments or now, digital currency! That seems to be the new bee in the government’s bonnet, when its job ought to be to first ensure that the poorer India catches up with the “New India”. And while it is good to see that some MSMEs like the new tech start-ups are doing well, we need to encourage greater research and development in specialized areas, as I had said long ago in an Owl Wisdom Podcast about making India more competitive. Besides, the ECLGS scheme to help MSMEs has been extended, but so must the banks’ willingness to lend.
Finally, in keeping with Murphy’s Law of budget planning and repeating old mistakes, the government once again didn’t divest what it targeted. And it has perhaps wisely reduced its target for FY23. I am inclined to think that the government (this or any previous one) lacks the political will to see it through because it is loth to lose its dividend income, which is a sizeable part of its non-tax revenue. Though one can’t see the benefit of holding on to losses endlessly either!
Only time will tell what another supply side, government capex-led budget will achieve. For starters, won’t it crowd-out private investment especially the part that is dependent on bank lending?