The Union Budget: Can it restore the growth?

From an economic point of view, it was expected that to boost up the demand, the government would put money in the hands of the middle class through tax relief and by other schemes and subsidies to the poor.

The Union Budget : Can it restore the growth?

The Budget for FY23 came at a time when the economy is suffering from the highest level of unemployment, the policy-induced unprecedented job losses, lower household savings, decrease in household consumption(the first time since independence). The middle class has shrunk and a large number of the poor have been pushed below the poverty line. Consequently, the economy is suffering from low demand. At the same time, the inflation remained much higher than the RBI target rate of 4% for more than several years.

From an economic point of view, it was expected that to boost up the demand, the government would put money in the hands of the middle class through tax relief and by other schemes and subsidies to the poor.

Also Read: Union Budget 2022-23: Key Takeaways; pushing for a shift to sustainability

From a political perspective also, in view of coming elections in the largest state of India along with four other states, it was expected that some relief will be announced in the budget which is quite normal for any government in a democracy.

But nothing of that sort has happened. No tax relief, direct or indirect, has been announced for the middle class. For the poor, the cash transfer provision for women has been discontinued, MGNREGA allocation and the food security budget have been reduced. The fertilizer subsidies are cut at a time when the fertilizer prices are soaring.

The MSME sector, the largest employer in the unorganized sector that employs ninety percent of the workforce, had been the worst hit repeatedly in recent times, first due to demonetization, then GST, and now due to lockdown and the pandemic. The only help announced for them was the credit guarantee scheme which was not beneficial to most of them struck with demand constraints and higher input costs.

Some experts argue that the government believes in supply-side economics meaning that the problem is not a lack of demand in the economy but disruption of supply of commodities due to the pandemic. Therefore, the supply side is to be augmented by helping the corporates (PLI scheme, tax cut, etc.) and it will bring in investment and generate employment and consequently the demand in the economy. For that to happen, initially the government needs to increase Capital Expenditure (CAPEX) that will “crowd in” private investment.

In normal circumstances, one can hardly deny this policy in principle. But going by the experience, this policy is not working now. For example, the government increased the CAPEX last year to about 6 lakh crores(RE). In September 2019, just 40 hrs before PM Modi’s Houston event, India announced a massive corporate tax cut resulting in a revenue loss of 1.45 lakh crores. The reason given was that this would increase corporate investments. But the corporates used the windfall money to pay back their loans and invested in the financial assets creating a stock market bubble. There was no significant increase in credit off-take or surge in private capital investment. The reason is that already the industry has spare capacity due to low demand. Why should they create further capacity?

In this budget, the CAPEX has been increased to about 7.5 L Crores. But announcing is one thing and actually, spending is different. Even last year’s CAPEX allocation had not been fully spent. Besides, such investments take time to produce the results whereas the problem at hand requires immediate relief. As the illustrious economist, John Maynard Keynes said, “In the long run we are all dead.”

In the present context, the dire state that they are in, the poor will hardly survive to see the Amrit-Kaal, twenty-five years later.

It is not being suggested here that CAPEX is not required, but in the present situation, this alone can not produce the results. The fact is that the total expenditure of the government in this budget has increased by 1.7 lakh crore which is only a 4.5% increase that doesn’t even account for inflation. That’s why the CAPEX allocated is actually at the expense of revenue expenditure by cutting the cash transfer and subsidies etc. to the poor that, in fact, could have generated the demand.

The government borrowing has increased in the proposed budget which was reflected in a sharp reaction in the bond market post the budget speech. As it is, the government debt has reached 90% of GDP and about 25 percent of revenue expenditure goes for interest payment on the debt. The fresh borrowing may be at a higher rate of interest which will strain the expenditure budget further.

The budgeted revenue depends on the GDP growth and is calculated on the projected nominal GDP growth rate(without factoring in the inflation). The nominal growth rate has been taken at 11.1% in the budget calculation which means, assuming the inflation rate at 5% (the inflation rate is 5.59 % for December 21) the real GDP growth rate should be around 6% in FY23. The economic survey projected the GDP growth rate at 8-8.5% and interestingly, RBI has projected it at 7.8%. The FM has defended the RBI projection and said that the inflation rate for FY23 will be 3 -3.5%. But simple arithmetic is not always good economics. Such a low level of inflation is quite unlikely going by the previous years’ trend and the fact that inflation in the western world has reached an all-time high. The rise in energy prices will adversely affect inflation and the current account deficit of India. Besides, the expected rise in the interest rate by FED may affect the foreign fund flow and foreign exchange rate putting further pressure on the budget by making the imports costlier.

The collapse of the Indian economy in 2020-21 when the GDP growth nose-dived to -7.3% and then its subsequent recovery in 2021-22 to the level of 2019-20 is to be seen in the perspective of growth figures in the previous years. India’s GDP growth rate was 8.3 % in 2016-17 which became less than half in three years to only 3.7% in 2019-20, the pre-pandemic year. It is ridiculous that we are now celebrating being able to equal the GDP of FY 20 this year i.e in FY22. This means that we have lost two years without any growth and stand where we had been two years back that too the year of the lowest growth in many decades. As nothing has fundamentally improved, if not worsened, it is too much to expect that now onwards, discounting the low base effect, India will grow at a real GDP growth rate of about 7-8%. Therefore, the miseries are likely to continue in the near term.

For the present, we can at best pray that at least suddenly another demonetization type of stunt is not performed on the economy in the name of introducing a digital rupee as proposed in the budget.

Ratan Chakraborty

Introduction: Ratan Chakraborty is a former Senior Management professional in a large PSU with long experience in the techno-commercial domain.

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The Union Budget: Can it restore the growth?
From an economic point of view, it was expected that to boost up the demand, the government would put money in the hands of the middle class through tax relief and by other schemes and subsidies to the poor.
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