A bold effort at public investment-led growth

But the Budget barely mentions the fall in share of private consumption in GDP and rising economic inequality

February 02, 2022 12:02 am | Updated 01:00 pm IST

Staff at an electronics goods showroom watch the telecast of union budget being presented by India's Finance minister on the displayed television sets at a showroom in Mumbai on February 1, 2022. (Photo by Indranil MUKHERJEE / AFP)

Staff at an electronics goods showroom watch the telecast of union budget being presented by India's Finance minister on the displayed television sets at a showroom in Mumbai on February 1, 2022. (Photo by Indranil MUKHERJEE / AFP)

The Union Budget starts with a self-congratulatory announcement that India’s domestic output (GDP) is likely to grow 9.2% this year (2021-22) over last year — the highest among the world’s large economies. What is unsaid is that India’s output contraction the previous year (2020-21) was among the worst in the world. Compared to the pre-pandemic year (2019-20), the current year’s GDP will be marginally higher by 1.3%, as per the Economic Survey. If the adverse effect of the ongoing wave of the Omicron virus is factored in, the (estimated) modest rise in GDP may vanish. Thus, it is worth starting with the factually accurate picture that India lost two years of output expansion. In other words, per capita income today is lower than it was two years ago. Regarding sources of demand, the share of private consumption declined by three percentage points of GDP between FY2020 and FY2022. The Government stepped up its expenditure to mitigate the decline, but only modestly; hence, the marginal output expansion. In contrast, the United States boosted public spending by about 10% of GDP, and its output roared back!

This year’s Budget seeks to boost public investment by 35.4% at current prices over last year to raise its share in GDP to 2.9% from 2.2% last year. With grant-in-aid for state investments, the Budget hopes to increase public investment share to over 4% of GDP. The Budget hopes to trigger a virtuous investment-led output and employment growth by arguing in favour of the “crowding-in” effect of public investment on private investment. The theory is sound and is a welcome change from the past policy stance. The crux will be to mobilise resources to finance the investment as the Budget seeks to reduce the fiscal deficit ratio, as per the schedule laid out in the last Budget. The critical question is whether additional tax and non-tax revenue (that is disinvestment proceeds) will be sufficient to finance the investment plan.

To refresh our memory, last year too, public investment was sought to be raised by about the same proportion (34.5%). I had written, “These figures certainly look impressive. The realisation of these investments would crucially depend on tax revenue realisations, disinvestment proceeds, sale of rail and road assets and the Government’s ability to raise resources from the market, without raising interest rates for the private sector.” (https://bit.ly/3AWzxKP) It is ditto and holds for this year as well. Indeed, public investment has picked up in the current fiscal, by barely 0.2% of GDP. With the threat of higher (imported) inflation (on account of rising international oil prices) and rising interest rates (on account of the US Federal Reserve’s decision), meeting the ambitious investment target would be challenging, but it is worth attempting.

On the employment crisis

But the larger question is: how will it address the sharp decline (of three percentage points of GDP) in private consumption, which is likely to be caused by loss of employment? The derived demand for labour from an infrastructure boost may be limited, as the suggested projects are machinery intensive, not labour intensive. The Budget does not directly address the employment crisis caused by the novel coronavirus pandemic and the lockdown. The employment crisis would call for enhanced allocation for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and initiating a similar scheme for meeting urban unemployment. Instead, shockingly, the Government has slashed the allocation for MGNREGA by 25% over last year.

Industrial slowdown

The manufacturing sector’s share in GDP has been stagnating at around 15% of GDP for quite a while. The annual industrial growth rate has sharply slowed down from 13.1% in 2015-16 to minus 7.2% in 2020-21. Perhaps a most telling example of the industrial slowdown is the fall in two-wheeler sales. As per news reports, it fell to 11.77 million units in 2021, below 11.90 million units sold in 2014. Expectedly, employment has contracted, most of which in the informal or unorganised sector. Lack of demand is the real problem, with low capacity utilisation. Indeed, the proposed public investment would create demand for capital and intermediate goods. But if a substantial share of such investment “leaks” out as imports, then the industrial output may not get the desired boost.

It is essential to appreciate that India has become an import-dependent economy,especially on China. Despite the clarion call for Atmanirbhar Bharat, India’s imports have shot up. Research reports show that India’s trade deficit with China has gone up from $57.4 billion in 2018 to $64.5 billion in 2021. The figure would be much higher by China’s official trade account. And the deficit would be even higher if exports from China and Hong Kong to India are combined.

Premature on PLI scheme

India launched a production linked incentive scheme (PLI) for numerous technology-intensive products, starting with mobile phone assembly a few years ago to augment production and reduce imports. The Budget has mentioned the overwhelming response to the scheme. However, evidence on the number of such projects that have taken off, their investment and employment generation and rise in domestic content in such industrial units is too sparse. Hence, it is premature to claim the success of the PLI scheme.

India launched the “Make in India” initiative in 2014-15 to raise the manufacturing sector’s share in GDP to 25% and create 100 million new jobs in the industry by 2022. However, the Government diagnosed the principal barrier to increasing manufacturing in India as excessive and dysfunctional regulation holding back the private initiative.

The solution, it was argued, was to improve India’s rank in the World Bank’s Ease of Doing Business (EDB) index. India did splendidly to improve its rank — from 142 in 2014 to 63 by 2019-20. But the improved ranking failed the industrial sector miserably, with a steady slowdown, noted above. Last year, the World Bank scrapped the index as it was flawed globally and reportedly politically motivated (https://bit.ly/3HlaWSm).

Yet, the present Budget harps on improving the EDB index and reducing regulatory constraints on industry and infrastructure to boost growth. It appears shocking as the Government refuses to learn from past mistakes.

To sum up, the Budget for 2022-23 is a bold effort at public investment-led growth — quite similar to last year’s. The widely discussed concerns of the unemployment crisis, fall in the share of private consumption in GDP, and rising economic inequality (caused by the pandemic and the lockdown) have been barely mentioned in the Budget. Instead, the Budget pins its hope on investment to boost employment, as derived demand for labour. Without fully committed funds for capital investment, the success of the ambitious effort remains questionable.

R. Nagaraj is with the Centre for Development Studies, Thiruvananthapuram

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