A bold effort at public investment-led growth

• The Union Budget starts with a self-congratulatory announcement that India’s domestic output (GDP) is likely to grow 9.2% this year (2021-22) but unsaid is that India’s output contraction the previous year (2020-21) was among the worst in the world.
• Budget barely mentions the fall in share of private consumption in GDP and rising economic inequality.

Earlier Scenario

• Compared to the pre-pandemic year (2019-20), the current year’s GDP will be marginally higher by 1.3%, as per the Economic Survey.
• If the adverse effect of the ongoing wave of the Omicron virus is factored in, the (estimated) modest rise in GDP may vanish.

Some factual realization

• India lost two years of output expansion.
• Per capita income today is lower than it was two years ago.
• The share of private consumption declined by three percentage points of GDP.

Investment led Budget

• This year’s Budget seeks to boost public investment by 35.4% at current prices over last year to raise its share in GDP to 2.9% from 2.2% last year.
• With grant-in-aid for state investments - Budget hopes to increase public investment share to over 4% of GDP.
• Budget hopes to trigger a virtuous investment-led output and employment growth by arguing in favour of the “crowding-in” effect of public investment on private investment.
• The crux will be to mobilise resources to finance the investment as the Budget seeks to reduce the fiscal deficit ratio, as per the schedule laid out in the last Budget.
• The critical question is whether additional tax and non-tax revenue (that is disinvestment proceeds) will be sufficient to finance the investment plan.

The employment crisis

• Loss of employment: due to sharp decline (of three percentage points of GDP) in private consumption.
• Projects are machinery intensive, not labour intensive.
• Budget does not directly address the employment crisis caused by the novel coronavirus pandemic and the lockdown.
• Need for enhanced allocation for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and initiating a similar scheme for meeting urban unemployment.
• But the Government has slashed the allocation for MGNREGA by 25% over last year.

Industrial slowdown

• The manufacturing sector’s share in GDP has been stagnating at around 15% of GDP for quite a while.
• The annual industrial growth rate has sharply slowed down from 13.1% in 2015-16 to minus 7.2% in 2020-21.
• Ex. fall in two-wheeler sales, it fell to 11.77 million units in 2021, below 11.90 million units sold in 2014.
• Employment has contracted, most of which in the informal or unorganized sector.
• Lack of demand is the real problem, with low capacity utilization.
• If a substantial share of such investment “leaks” out as imports, then the industrial output may not get the desired boost.
• India did splendidly in EDB to improve its rank from 142 in 2014 to 63 by 2019-20. But the improved ranking failed the industrial sector miserably, with a steady slowdown.

Still Import dependent

• India has become an import-dependent economy, especially on China.
• Despite the call for Atmanirbhar Bharat, India’s imports have shot up.
• India’s trade deficit with China has gone up from $57.4 billion in 2018 to $64.5 billion in 2021.
• The deficit would be even higher if exports from China and Hong Kong to India are combined.

Premature on PLI scheme

• India launched a production linked incentive scheme (PLI) for numerous technology-intensive products.
• Evidence on the number of such projects and success in employment generation and rise in domestic content in such industrial units is too sparse.
• The principal barrier to increasing manufacturing in India is “excessive and dysfunctional” regulation holding back the private initiative.

Criticism

• Cutting down funds to MGNREGS which ensures informal employment.
• Additional tax and non-tax revenue might not be sufficient to finance the investment plan.
• The present Budget harps on improving the EDB index and reducing regulatory constraints on industry and infrastructure to boost growth.
• It appears shocking as the Government refuses to learn from past mistakes.

Conclusion

• The Budget for 2022-23 is a bold effort at public investment-led growth is quite similar to last year’s.
• The widely discussed concerns of the unemployment crisis, fall in the share of private consumption in GDP, and rising economic inequality (caused by the pandemic and the lockdown) have been barely mentioned in the Budget.
• The Budget pins its hope on investment to boost employment, as derived demand for labour.
• Without fully committed funds for capital investment, the success of the ambitious effort remains questionable.