As the Union Budget charts the pathway to development for the next 25 years, faltering consumption demand is still a concern
This brief is a part of the Budget 2022: Numbers and Beyond series.
The Economic Survey of India 2021–22 projects an 8–8.5 percent growth rate for FY 2022-23, considerably lower than the International Monetary Fund’s more optimistic predictions of a 9 percent annual growth rate. Even then, the government acknowledges, this growth figure hinges on crucial assumptions such as no further significant pandemic-induced economic disruptions, good monsoons, orderly withdrawal of global liquidity (if any) amidst rising inflationary pressures, stable fuel prices, and an overall downturn in global uncertainties. Advanced estimates for FY 2021-22 suggest a complete recovery in the national income (in terms of real GDP) to pre-pandemic levels. Against this backdrop, the Union Budget 2022 sets out to chart a development path for the next 25 years of the Indian economy, termed as India’s ‘Amrit Kaal’. Set upon four principal pillars—inclusive development, productivity enhancement, energy transition and climate action, and private and public investments—this year’s budget attempts to reestablish India’s commitment towards the Sustainable Development Agenda 2030, primarily driven by technological advancements.
Against this backdrop, the Union Budget 2022 sets out to chart a development path for the next 25 years of the Indian economy, termed as India’s ‘Amrit Kaal’.
There are certain big steps the government has pledged to take, as highlighted in the introduction to the 2022 Budget. A greater impetus is to be given to programmes such as PM GatiShakti supporting large-scale infrastructure development, logistics efficiency, and seamless connectivity. The national master plan under this scheme envisages to align all the seven engines of growth under the National Infrastructure Pipeline to generate productivity increases and long-term economic growth. It has also announced the intent to formulate and introduce a ‘Digital Rupee’—the Central Bank Digital Currency (CBDC)—using blockchain technologies by 2022-23 to reduce transaction costs associated with the currency management system and increase its efficiency.
The budget document also lays out visions for inclusive development in the agriculture sector, supported by co-investment models to finance rural startups; urban development with an increased focus towards Tier 2 and 3 cities; inter-linking of major platforms like Udyam, e-Shram, etc. to ensure credit facilitation and skill development; and, universalisation of education and health—focusing particularly on mental health—supported by the digital economy. Allocations have also been made to ensure efforts towards climate action and energy transition, through incentivising installation of solar PV modules, transitioning to a carbon neutral economy, and, also supporting creation of new business opportunities in the circular economy.
The national master plan under this scheme envisages to align all the seven engines of growth under the National Infrastructure Pipeline to generate productivity increases and long-term economic growth.
While all these are welcome steps, the government would have to tread carefully to balance the inherent trade-offs and challenges. Also, it certainly begs the question—have we completely recovered from the economic disruptions of the pandemic? If not, can the new measures continue to effectively propel the envisaged development agenda in the face of these persisting issues? Are there any missing links that the government will have to confront moving ahead?
The Indian economy has recovered from the worst economic contraction witnessed in many years. It would, still, be unfair to attribute this slump to the COVID-19 pandemic alone. India’s pre-pandemic growth stood at 3.7 percent, significantly lower than the 2016-17 rate of 8.2 percent. As posited by many economists, the gradual decline in private final consumption demand growth in the country has been the driving force behind the economic slowdown. According to an RBI report, Private Final Consumption Expenditure (PFCE) grew at 9.4 percent in 2021-22, primarily following up through the realisation of pent-up market demand. It is, however, yet to reach pre-pandemic levels. Inadequate market demand, in turn, has a direct bearing on business earnings and employment of the masses. This feeds into the crisis through low-income levels and further dips in market demand.
The previous budget could have played an instrumental role in augmenting income levels directly to mitigate this demand crisis. Instead, it focused on addressing supply gaps through infrastructure investments and failed to triage both health and education sectors that governments around the world have historically targeted to combat recession and inflation. The 2021 Union Budget was essentially a top-down approach in improving economic growth—instead of the more labour-intensive agricultural sector, the industrial sector was targeted. The Indian economy stands at a crucial juncture today—dealing simultaneously with relative economic stagnation and rising inflationary pressures.
According to an RBI report, Private Final Consumption Expenditure (PFCE) grew at 9.4 percent in 2021-22, primarily following up through the realisation of pent-up market demand. It is, however, yet to reach pre-pandemic levels.
The growth rate of private consumption demand is projected to be 7.2 percent in 2022-23, propelled by massive public investments in employment-intensive sectors such as agriculture and infrastructure. Besides, the 2022 Union Budget also granted several direct tax concessions to raise disposable income levels and incentivise corporates and co-operatives to undertake private investments leading to employment generation. Specific tax concessions have been given to parents of persons with disabilities. Tax cuts for co-operatives were also announced: The Alternate Minimum Tax rate paid by co-operative societies has been reduced to 15 percent from the previous rate of 18.5 percent.
The Finance Minister lauded the success of the Production Linked Incentives (PLI) scheme—acknowledging its crucial role in the realisation of the ‘Atmanirbhar Bharat’ vision—highlighting its potential for job creation. It is projected to add 6 million new jobs in the next five years. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), jointly set up by the MSME Ministry and SIDBI in 2000 to catalyse the flow of institutional credit to micro and small enterprises (MSEs), is said to be overhauled with an increase in funding to “facilitate additional credit of INR 2 trillion for micro and small enterprises and expand employment opportunities,” according to the Union Finance Minister.
The 2022 Union Budget also granted several direct tax concessions to raise disposable income levels and incentivise corporates and co-operatives to undertake private investments leading to employment generation.
On the other hand, the budgetary allocation for MNREGA has decreased to INR 730 billion from the previous year’s INR 980 billion. Also, no changes in the income tax slabs for FY 2021-22 have been announced. The only relief is that taxpayers will be able to file their updated Income Tax Returns (ITRs) within two years of declaration. The widely anticipated increase in standard deduction was also not raised in view of the current levels of inflation.
While a prospective increase in capital expenditure has been laid out in the budget, this alone will not help stimulate demand. The PLI Scheme and revamped CGTMSE are prominent supply-side interventions. Though the announcements are welcome, there is still no clarity or assurity on how these will lead to job creation. Tax concessions for co-operative societies is also a step in the right direction to support financial inclusion of MSMEs which is crucial towards achieving efficiency and equity in the long run.
However, these measures must be supplemented with more direct efforts to increase market demand. Given that the pandemic has led to large-scale job losses, the most vulnerable population is exhausting its limited savings to consume goods and services presently. This has significantly contributed to the slow revival in consumption demand despite adequate supply. In this case, employment generation programmes, having a large multiplier effect can provide immediate relief. An increase in the budgetary allocation of MGNREGA and its expansion to the urban areas could have led to assured job creation.
Tax concessions for co-operative societies is also a step in the right direction to support financial inclusion of MSMEs which is crucial towards achieving efficiency and equity in the long run.
Also, tax deductions for the middle- and lower-income groups could have caused a direct increase in disposable income in the hands of those who willingly spend a larger share of their income on consumption needs, compared to the richest few. This is also crucial for the success of the government’s attempt to boost business sentiments, particularly in the MSME sector. Increasing income levels for these groups is the best way to ensure market demand for the MSME sector’s products.
Thus, in consideration of the four pillars discussed earlier, the benefits will be reaped only in the long run. However, to combat the current stagflationary situation and support effective implementation of the new/updated schemes, concrete short-to-medium run measures are required to adequately boost private final consumption. The most effective avenue entails putting money in the hands of the masses through direct employment generation schemes like MGNREGA or income tax rebates for the middle class.
(The authors acknowledge Deborah Suares at NLSIU Bangalore for her research inputs on this article)
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Debosmita Sarkar is a Junior Fellow with the SDGs and Inclusive Growth programme at the Centre for New Economic Diplomacy at Observer Research Foundation, India. ...
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Soumya Bhowmick is an Associate Fellow at the Centre for New Economic Diplomacy at the Observer Research Foundation. His research focuses on sustainable development and ...
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