Revive growth?

The short answer to this question is that Union Budget 2022-23 has prioritised long-term growth over short-term growth. Two key numbers can be cited in favour of this argument.

One, the Budget has perhaps taken a more conservative view of short-term growth than even the Economic Survey, which was released a day before it. The survey projects an 8%-8.5% real GDP growth rate subject to a set of assumptions such as oil prices coming down significantly from their current levels. The Budget has assumed a nominal GDP growth rate of 11.1%. Given the current levels of domestic and international inflation, it is unlikely that the GDP deflator will be under 3 percentage points. This essentially means that the Budget is factoring in a lower real GDP growth rate than what the survey has assumed, but stopped short of saying so explicitly.

The second part of this argument is best approached from the national income identity side. A country’s GDP is basically the sum of consumption, investment, government spending and net exports. Because there are no direct consumption boosters in the Budget, it can be assumed that the government has taken the public investment route to boost growth.

The finance minister said this clearly in her speech when she talked about public investment crowding in private investment and boosting future incomes. The Budget decision to significantly increase financial assistance to states for capital spending is yet another move in this direction.

This hike from ₹15,000 crore for 2021-22 revised estimates to ₹1 lakh crore (in the form of 50-year interest free loans over and above normal borrowing to states) is an effort to nudge states to divert greater resources towards capital spending.

While the Budget speech did not say this explicitly, there is also a big bet on the net export route to boost GDP in this year’s Budget.

A host of customs duty recalibrations to give a boost to domestic manufacturing is a clear effort towards achieving this. By reducing customs duties on key inputs such as mobile phone components and raising them on a variety of capital goods, and also talking about bringing in a new Special Economic Zones (SEZ) policy the government is clearly hoping to give a fresh boost to import substitution as well as export oriented manufacturing, both of which it expects will raise the net export component of the GDP identity.

This year’s Budget, in keeping with its predecessors, has made yet another attempt to attract foreign capital to cater to the economy’s long-term finance requirements.

After having announced sovereign bonds in 2019-20 (the announcement was not followed up eventually), this year’s Budget talks about floating sovereign green bonds to finance India’s investment needs to tackle the climate crisis. This move is clearly aimed at tapping into the booming international market for climate finance.

To be sure, the Budget has not done much to give a boost to consumption spending in the economy, which accounts for more than half of India’s GDP. Does this mean that there is no strategy as far as consumption demand is concerned?

Here Union Budget 2022-23 has erred perhaps in omission rather than commission. By not raising direct taxes, which are primarily paid by the rich in the country, it is hoping that the consumption demand of the rich will continue to compensate for what seems to be tepid purchasing power of the non-rich. This seems to be in keeping with the line of argument of some independent economists that the poor do not matter as far as India’s consumption demand is concerned.

Any significant increase in support to the poor, at the given level of fiscal deficit, would have required either a reduction in capital spending or a higher tax on the rich.

Will this approach work? Two factors will matter the most here.

First is the level of inflation in the next fiscal year. If oil prices are significantly above the $70-75 per barrel level assumed in the Economic Survey, there is bound to be trouble on both the private consumption (via an inflation squeeze on purchasing power route) and net export (via higher import bill for crude oil) components of GDP. To be sure, the survey and (by extension) the Budget have been upfront in making this assumption.

The other threat to the Budget’s larger scheme is a divergence between the fortunes of the formal and informal sector, where the latter is believed to have entered a vicious circle of low income and low demand. While opinions are polarised on this issue, lack of credible data due to absence of key NSSO surveys such as the Consumption Expenditure Survey and the one on Informal Sector Enterprises could have blinded the official view to these pitfalls.