India’s economy contracted by 7.5% in 2020-21. Due to Covid-19 lockdowns, the number of poor increased, reversing the trend of the last three decades.
What the Budget doesn’t explain, however, is the inadequate capacity of the Centre to fully spend. (Reuters)
According to a study conducted by Azim Premji University, an additional 230 million people were pushed below the poverty line due to the pandemic. The top 1% owned more than one-fifth of the total national income in 2021, while the bottom half owned just 13.1%, according to the World Inequality Report. The income gap between the top 10% and the bottom 50% in India was one to 22 in 2021. In a trend unprecedented since liberalisation, the annual income of the poorest 20% of Indian households plunged 53% in 2020-21 from their level in 2015-16. In the same period, the richest 20% saw their annual household income grow 39%, showing the sharp contrast in Covid-19’s economic impact on the bottom of the pyramid and the top. It was expected that the finance ministry would be mindful of these facts. But these hopes were belied.
The Budget, instead, is a vision document high on promise but short on facts, relying on complementing ”macro-growth with micro-all-inclusive welfare”, digital economy and fintech, tech-enabled development in improving productivity in agriculture, energy transition, and climate action. The major instrument for reviving growth, creating jobs, and “pump-priming” private investment is public investment in infrastructure. The capex target was expanded by 35.4% — from ₹5.54 lakh crore to ₹7.50 lakh crore. This is welcome.
What the Budget doesn’t explain, however, is the inadequate capacity of the Centre to fully spend. The November report on expenditure by the Controller General of Accounts (CGA) shows that in the first eight months of this fiscal, only 49.9% of the targeted amount could be spent on infrastructure. For the last seven-eight years, private investment has been languishing. In the case of manufacturing, with about 35% of installed capacity in Indian industry lying unutilised, what will drive new investments?
Private consumption would ordinarily create a demand push to galvanise private investment. Even in 2021-22, private consumption forms around 55% of the economy, and no economic recovery can be called complete unless private consumption expenditure becomes greater than what it was before the pandemic. The Economic Survey noted, “Private consumption is also estimated to have improved significantly to recover 97% of corresponding pre-pandemic output level”. In other words, consumption in 2022-23 is only likely to reach close to the 2019-20 level. The distress in the rural areas is also visible as the number of households demanding work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) was 42% higher than in 2019-20. This comes as no surprise considering that large parts of the informal economy, in which almost 90% of people work, has been destroyed.
“If the country wants high sustainable growth, it must raise the investment rate. But investment needs funding,” says Pranjul Bhandari, chief India economist at HSBC.
However, for this, the domestic savings rate must also be high. Unfortunately, India’s savings rate was falling even before the pandemic. It touched a 15-year low as gross domestic savings stood at 30.9% of the Gross Domestic Product (GDP) in 2020-21, down from a high of 34.6% in 2011-12. Household savings fell from 23% of GDP in 2012-13 to 18% in 2019-20. While the government invites foreign direct investment to fill the gap, it cannot fulfil the investment needs of the economy. The Budget does not have any impulses to incentivise savings either.
For increasing demand, people should have been given cash transfers for a defined period. There should have been, what the former Union finance minister P Chidambaram calls a “rescue plan” for the micro, small and medium enterprises (MSMEs). There should also have been incentives for the services sector to begin growing at a healthy clip. The Budget should have laid out a strategy to deal with it over a medium-term horizon. But the FM has missed the opportunity to put the economy back on track.
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