The economic rationale behind Budget 2022

Budget 2022

Finance Minister Nirmala Sitharaman presented her fourth consecutive Union Budget at a time when the government is being questioned on unemployment, and inflation.

Experts were speculating a populist Budget to lure the masses before the upcoming elections. However, the government moved further in the direction of infrastructure development, and supply-side reforms.

Budget 2022 clears the government’s vision for India, and the confidence it has in its policies. Rather than giving in to the populist demands for short-term gains, the government has laid down the path for long-term sustenance, and has ticked all relevant boxes to provide impetus to the economy.

With the pandemic continuing for the third year, the revival of the economy has not been an easy task. The Union government has been following the Keynesian framework of boosting public expenditure to stimulate growth in productivity, output, and real income.

An expansionary fiscal policy is required to close out the recessionary gaps in the economy due to subdued demand. Economists have argued for a fiscal stimulus through cash transfers to revive consumer sentiment to increase demand. However, given our vast population and conservative mindset, cash transfers might not generate the desired results. The majority of the lower and middle income could end up saving a large proportion of the transferred cash. Given a smaller marginal propensity to consume (MPC), the multiplier effect of such transfers will not generate a spiral effect to boost demand.

As stated in Friedman’s Permanent Income Hypothesis, consumer spending depends on the long-term average income of the consumer. Thus, an expansionary fiscal policy that creates demand is important to increase demand in the economy. In the Budget, the total outlay has been increased to Rs 39.45 lakh-crore, and the capital expenditure target for FY2022-23 has been fixed at Rs 7.5 lakh-crore, which is 35.4 percent higher than the budget estimates of the previous year.

The incremental capex is to be used for the development of infrastructure. Infrastructure development not only builds assets, but helps in creating jobs, increasing demand, boosting the allied sectors of construction, solving logistical challenges, improving supply chain management, etc.

Infrastructure projects create jobs from the day the project is approved. In the short run, it will require construction workers, managers, engineers, etc., while in the long run, opportunities will arise not just in the form of maintenance workers, but through the many businesses that will pop up around the project. The construction activities will also boost the allied sectors with an incremental demand in steel, cement, logistical support, etc.

Sitharaman announced that provisions have been made for payment of 75 percent of the running bills, mandatorily within 10 days. Such measures will ensure the optimal utilisation of capital by allowing the developers to take up multiple projects simultaneously — which will facilitate job creation.

Public investment is being made with an intention to crowd in private investment. Along with involving the private sector in developing projects, infrastructure helps the industry in reducing their costs, and connects the firms with domestic and global markets. This makes the firms more competitive and efficient, and they are incentivised to invest more to expand their production and hire more labour. As the permanent income rises, the consumption demand expands and a higher multiplier effect is generated. This process will then initiate a virtuous cycle of consumption-led growth.

Another major thrust of the government has been on supply-side reforms. These reforms have twin benefits in reviving the economy. First, it helps in removing the supply bottlenecks, and preparing the firms to cater to the incremental demand in the future. Second, as the Say’s Law states, ‘supply creates its own demand’. The increased production will increase demand for raw materials and labour. This increased labour force will generate further demand with a multiplier effect.

The PLI schemes will create 6 million new jobs, and help in expanding production and preparing the industry for global markets. Along with this, the extension of credit guarantee and credit trust schemes with the RAMP programme announced in the Budget will help the MSME sector become more resilient, efficient, and competitive. A robust manufacturing sector, with its forward and backward linkages, will provide tremendous growth and employment opportunities.

Overall, it is a balanced Budget that includes everyone, and is not populist. Budget 2022 focuses on economic growth to generate demand and employment opportunities. It aims not only for demand revival but also sustenance at a higher demand.

With these continuous efforts to boost the production capacities, India is on the path to achieving a $5 trillion mark by 2025-26.

Abhishek Malhotra specialises in urban economics, and is a consultant in the Office of Chief Economic Adviser, Ministry of Finance, Government of India.

Views are personal, and do not represent the stand of this publication.