While Budget 2022 has made allocations to address the challenges faced by the economy, effective implementation of the Budget will be key to its success
This brief is a part of the Budget 2022: Numbers and Beyond series.
Increased capital expenditure is expected to address the issue of slow-paced structural transformation in India and the palpable risk of a middle-income trap, with a boost to infrastructure spending crowding in private investment.The pathway to growth chosen by the budget is increased capital expenditure while the revenue expenditure has not been increased much. Increased capital expenditure is expected to address the issue of slow-paced structural transformation in India and the palpable risk of a middle-income trap, with a boost to infrastructure spending crowding in private investment. However, while the figure that has caught the attention is a 35 percent increase in capex, the devil lies in the details. Firstly, the 35.4 percent increase in capex follows from a comparison of budget estimates (BE) of 2021-22 and that of 2022-23. If, however, the comparison is between revised estimates (RE) of 2021-22 and BE of 2022-23, then the increase in capex stands at 24.5 percent. Secondly, if the total capex, including both total expenditure through budget and resources of public enterprises is considered, it follows that while the former has been increased by 24.5 percent, the latter has been reduced by 6.6 percent. As such, the actual increase in total capex stands at 10.4 percent. While the capital expenditure will generate the multiplier effect with a lag, the revenue expenditure induces direct demand in the economy by influencing consumption. Given that India is a consumption-driven economy, appreciable increases in the revenue expenditure are expected to boost growth. Nevertheless, the increase in revenue expenditure in the current budget is as meagre as 0.9 percent. Concerns of fiscal responsibility and debt sustainability, which assume significance in the near term global economic conditions, may have prompted this move. Nevertheless, this move will be justified only if the gains from this trade-off, in the form of macroeconomic stability and steady capital inflows, outweigh the losses in terms of growth emanating from direct demand.
Concerns of fiscal responsibility and debt sustainability, which assume significance in the near term global economic conditions, may have prompted this move.The budget has also refrained from providing direct tax concessions, which could boost consumption. Given the prevalence of stagflation in the Indian economy, the budget could have taxed the wealthiest while providing some relief to the middle class. The budget has not done so. While taxing of wealth has been partially achieved by the taxation of digital assets, this is a limited move. The budget could have very well brought back the wealth tax or tweaked the surcharge on the super-rich to compensate for the loss of revenue from the tax relief provided to the middle class. This wealth tax could be a feature of the budget only while the economy is in the phase of recovery. The government has taken several steps to improve logistics, boost digitisation, and other measures to enhance ease of doing business, which will pave the way for structural transformation by improving productive efficiency of physical and human capital in manufacturing. These measures will complement the capital expenditure promised in the budget. Nevertheless, there have been disappointments in terms of the boost given to the power sector and of compensating for the negative impact of the pandemic on human capital accumulation. While the Finance Minister did mention that there will be investments in clean energy storage systems, allocations to smart grid infrastructure and an overhaul of the transmission and distribution infrastructure were completely missed in the budget. The disruptions in formal education caused by the pandemic, which disproportionately affected children belonging to the vulnerable sections of society, could be responsible for permanent school dropouts, further accentuating inequality of opportunity, especially gender inequality. Yet the solutions to compensate for such losses have been technology-centric even when the access to and quality of power and internet connectivity is questionable, especially in the context of those disproportionately affected.
The nation continues to rely significantly on Union excise duties and service tax as well, apart from the goods and services tax (GST).While the budget claims that India has realised the dream of ‘one market-one tax’, this is far from the reality. The nation continues to rely significantly on Union excise duties and service tax as well, apart from the goods and services tax (GST). In the current budget, while GST accounts for 59 percent of indirect taxes, Union excise duties and service tax account for a sizeable 25 percent. The Budget speech addressed not just the need to sustain megacities, but also boost development of Tier 2 and 3 cities. It also mentioned that urban planning support will be extended to states. While this may seem like a significant thrust is being placed on urban development, the actual allocations do not substantiate this promise. Comparing RE 2021-22 with BE 2022-23, the increase in allocations to urban development is a paltry 3 percent. Moreover, there is no financial empowerment promised to the urban local bodies who are actually responsible for urban development and management. There has been no attempt to enhance the functional and fiscal autonomy of urban local bodies, which is critical for good urban governance, by directing the states to do the needful. The budget displays concern about the development needs of border villages with sparse population, limited connectivity, and infrastructure. The importance given to infrastructure development and job creation for these villages is welcome since it addresses the issue of regional backwardness and acts as a precursor to urbanisation. The funding for this initiative will come from converging existing schemes and some additional funding. Comparing the BE 2021-22 and BE 2022-23, the allocation has increased by 6 percent. However, comparing the RE 2021-22 and BE 2022-23, there has been a decline in allocation, albeit miniscule to the tune of 0.3 percent. Furthermore, convergence of existing schemes is a positive move only if the aim is to achieve efficient utilisation of resources, else there will be no incremental outcome from such convergence.
The importance given to infrastructure development and job creation for these villages is welcome since it addresses the issue of regional backwardness and acts as a precursor to urbanisation.The proposals for the development of the agricultural sector have been technology-centric rather than focusing on sustainable agricultural systems and practices, which are generally based on cost-effective natural solutions and the principles of circular economy, and do not demand too much reliance on technology. These sustainable agricultural systems and practices are known to improve resilience of agriculture to climate change, amongst other disruptions. Furthermore, with 87 percent of the peasants in India being small and marginal farmers, reliance on technology for boosting agriculture rather than on sustainable agricultural systems and practices makes little sense. Such practices require less investment and do not involve hurdles of poor access to technology. In conclusion, while the budget creates the perception of having addressed the crucial problems confronting the economy, there are doubts on the size of budget allocations and the nature of solutions proposed to deal with these problems. Finally, the proof of the pudding lies in the effective implementation of the budget and the kind of outcomes such implementation will bring about.
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Renita DSouza is a PhD in Economics and a Fellow at Observer Research Foundation Mumbai under the Inclusive Growth and SDGs programme. Her research focus ...Read More +