In huge capex bet, an audacity of hope
The FM has been audacious to attempt to strike this difficult balance in India’s $3 trillion economy amid such enormous global uncertainty and headwinds
The annual Union Budget ritual in India suffers from an identity crisis. Is it an accounting exercise of government revenues and expenditure? Is it an occasion to articulate economic strategy and a policy road map? Is it an exercise to pander to multiple constituencies with financial resources? Is it to present a report card on the state of the economy? The lack of a distinct identity for the Budget exercise has allowed each finance minister (FM) and government over the last three decades to shape it in the manner they want. This year’s Budget was all about crafty rhetoric and smooth expenditure management.
Every Budget takes place in a certain temporal context. The economic backdrop to this year’s Budget was soaring inflation, volatility in commodity prices, uncertainty in the global economy, a reversal to economic nationalism in developed economies, jobless economic growth and widening inequality. This meant that neither the private sector nor exports are viable options to deliver economic growth for India. The onus then fell on the government to do all the heavy lifting, and hence, government expenditure was the fulcrum of this year’s Budget, delivering the final death blow to that infamous 2014 election promise of a “minimum government”.
The ruling dispensation seems certain about what is considered good expenditure and bad, as evident in Prime Minister Narendra Modi’s “freebie” taunts and FM Nirmala Sitharaman’s constant refrain of “wasteful” expenditure. Capital expenditure (capex) for infrastructure projects is good, and welfare or direct income for people is bad, in their lexicon. Hence, the government chose to double down on capex spending with an increase of 33% from last year.
The Union government wants to spend ₹10 lakh crore in capex in the next financial year, more than thrice of what it spent five years ago. It naturally raises the question of the absorptive capacity for such a large increase in capex in the economy, especially when the government could not fully spend even the ₹7.5 lakh crore in capex that it had budgeted last year. Ostensibly, the government thinks that forcing such a large capex will not end up as wasteful expenditure.
To fund this large increase, the FM has relied on a whopping 33% cut in the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) expenditure and a 11% tax revenue growth from last year. MGNREGS is a demand-based programme under which people who have no alternative options to earn ask for minimum wage work. It is a good indicator of the state of the labour market. Drawing from the Economic Survey of 2022-23, nearly 70 million families will ask for MGNREGS work this financial year, far higher than pre-pandemic levels. This shows that regardless of labels of the fastest growing economy and meaningless International Monetary Fund projections of the Gross Domestic Product (GDP), jobs, incomes, and livelihoods are still a struggle for a large number of Indians. The government’s MGNREGS budget for the next year is lower than its expenditure in 2019 when 62 million families availed the scheme, lower than the current demand. This implies one of three things — the government expects more than 15 million families to find high-paying jobs and stop asking for MGNREGS work next year (which is highly unlikely), it will not cater to the demand (which is illegal as this is a right) or will overshoot its Budget (which happens every year). Whichever way, the government has chosen to risk the livelihoods of millions of poor families to punt on an ambitious capex bet and trickle-down effects for the economy. To be sure, increasing capex on infrastructure projects is a welcome directional shift in expenditure management. The debate is about the levels and the rate of such increases, and at what cost.
The other proverbial elephant in the North Block is the continued slack in private investment. The private sector just does not seem to want to invest despite the carrots of corporate tax cuts, credit schemes and Make in India slogans, and sticks of threats and implorations.
In 2010, for every ₹100 in gross tax revenues, ₹40 came from corporate firms and ₹26 from the ordinary citizen. Today, the burden has completely shifted to the common man who pays ₹47 while firms pay only ₹25. Corporate firms have been showered with tax cuts and other benefits to no avail.
The chief economic adviser laboured to show green shoots in private investment using quarterly data of public companies that are not convincing. With the whimsical and mindless corporate tax cuts in 2019, the government weaved a tangled web around its finances. It wants to increase capex and reduce the fiscal deficit for which it needs money. But it cannot increase corporate taxes when investment is already weak, and it is not wise to continue to burden the ordinary citizen with higher Goods and Services Tax and excise duties at a time of high inflation. Something’s gotta give.
There was much hoopla about income tax cuts for the salaried class which seems more like a ploy to lure people into the new income tax regime that has not seen many takers since its introduction two years ago. There were also the usual slew of schemes and customary announcements for various sections that ideally should be made in a campaign rally and not find a place in a Budget speech.
All the noise and drama of the ruling party and the nitpicking of the Opposition aside, the larger theme of the 2023-24 Budget is a big bet on capex to deliver trickle-down benefits, create jobs, boost incomes and lift economic growth, all while maintaining fiscal deficit targets. The FM has been audacious to attempt to strike this difficult balance in India’s $3 trillion economy amid such enormous global uncertainty and headwinds. Or, as former United States President Barack Obama might say, “The audacity of hope” is supreme.
Praveen Chakravarty is a political economist and Chairman of Data Analytics for the Congress. The views expressed are personal