The 2022 budget needed to do a balancing act. While the economy is back on the growth path, it has been uneven. The aggregate GDP number does not give a complete picture. Performance varied across sectors. Income growth across income classes has been divergent. So, the need of the moment was to ensure that the nascent growth is accelerated, while at the same time supporting those who are still struggling.
The current global economic environment does not make the job any easy. Inflation has been on the rise. Government debt was already high. The cost of borrowing is expected to go up. No doubt, it was a difficult ask. But, then no one said making a budget for a country like India was going to be easy. This budget, however, seems to disregard much of this complexity. There is no cognizance of sectoral growth being unbalanced, except for a mention of the hospitality sector. Neither is there any recognition, leave alone concern, for the recovery that seems to aggravate the already skewed income distribution.
The big thing that the government seems to be relying on is capital expenditure, which has increased by 35.4 per cent and the associated multiplier effect. While there is no doubt that a country like India which ranks in the lower middle-income group of countries can benefit from added investment, the more important question is will this lead to a sustained increase in investment, particularly from the private sector? Unless that happens, a one-time increase in government expenditure on capex may not yield much in the long run. In fact, the finance minister herself said so — that she hopes this will lead to crowding in of private investment. In this aspect, it seems that there is a misdiagnosis of the problem that private investment has not taken off. What we know from several accounts is that capacity utilization in a variety of sectors is still very low. This indicates lack of demand. Investing in infrastructure will not have an immediate impact on demand for a large number of sectors such as FMCG, high-touch services, etc., which depend on income rising across all income levels.
Here, it is important to point out, that raising capital expenditure will undoubtedly increase GDP, but one has to judge the benefit of this by comparing against other potential use of that fund. For example, had government started an employment guarantee scheme for the urban workers, or, transferred funds to MSMEs to offset against their salary bill, would it have benefited the economy more?
For that matter, the government could have simply reduced its debt. This is a hard question of looking at counterfactuals, but what is apparent is that the government has made no attempt to supplement income of the vulnerable segment of the population, either through an employment guarantee scheme or otherwise. This could have had an immediate effect on the demand, and helped the whole economy. Moreover, it is questionable how much is the multiplier for government spending on infrastructure at this point in India and how long it takes for such expenditure announcements to filter through the economy.
The other aspect of this budget is that the fiscal deficit continues to be high. The current financial year’s fiscal deficit is now estimated to be 6.9 per cent, slightly higher than the anticipated 6.8 per cent. This budget expects the fiscal deficit to be 6.4 per cent in the next fiscal year.
While there is a strong case to continue with high deficit even now, one has to keep an eye on the cost of financing the deficit. General government debt for India in 2021 stands at 90.6 per cent of the country’s GDP. Among emerging economies, only Brazil’s debt to GDP ratio is comparable to that. Other emerging economies have it much lower – for example, 68.9 per cent for China, 41.1 per cent for Indonesia, 47.9 per cent for Vietnam, 58 per cent for Thailand. Even for Brazil, it increased from 86.9 per cent in 2019 to the 90.6 per cent in 2021. For India, it increased by more than 20 percentage points in those two years, from 74 per cent in 2019 to 90.6 per cent in 2021. As the global economy is entering in a phase where liquidity will dry up and the cost of borrowing go up, this can quickly become a matter of concern, particularly if the growth rate fails to pick up and the economy does not grow at a fast pace for a considerable number of years.
Dr Partha Chatterjee is Professor and Head, Department of Economics at Shiv Nadar University.Views are personal and do not represent the stand of this publication.