Often, Budget speeches are political statements — more so, with impending general elections. There is a lot less to expect from an interim Budget. The Finance Minister’s Budget speech was short in substance and loud in claiming credit for the decade of supposedly spectacular growth, moderate inflation, and a record of social welfare.
Positives in the Budget
What are the positives? The Budget statement attributed post-COVID growth revival to public infrastructure investment and proposes to continue the same in the coming year with a 11% rise in capital expenditure. However, the government proposes a moderate expansion in public investment as it claims that private investment has revived. Moderating public investment, in principle, is expected to free up resources for the private sector, preventing “crowding-out” (displacing) of private investment.
In the last 3-4 years, the government has steadily raised public infrastructure investments, mainly on highways and communications, which seems to have contributed to turning around GDP growth rate in the post-pandemic years. Faced with the uncertain global energy supply situation after the war in Ukraine, it seems to have encouraged public sector oil, electricity and coal public sector undertakings to step up investment to improve energy security — setting aside the disinvestment and privatisation agenda for the moment. These decisions seem to have boosted public investment and output and stabilised the macroeconomic situation.
An item of public investment was 50-year interest-free loans offered to States (with conditionalities). The Budget proposes to extend the scheme in the coming year. This is perhaps a welcome move for growth as its utilisation by States has been substantial despite hiccups. Perhaps the scheme can be fine-tuned by taking into account State-specific requirements of its conditionalities.
The Budget proposes to replicate a similar scheme for promoting innovation and R&D for the private sector with a corpus of ₹1 lakh crore. The idea seems interesting if it helps boost industrial R&D. India’s R&D expenditure as a ratio of GDP has remained stagnant at 0.8% for decades now. India and China had similar levels of R&D to GDP ratio at 0.8% in 1996. After more than two decades, China’s ratio moved up to 2.2% of GDP, while India’s slipped to 0.6%. If the proposed long-term interest free loans could reverse the trend, the Budget proposal could be a game-changer.
The Budget applauded the recently announced scheme to set up rooftop solar in 1 crore households. This is welcome as India lags behind in tapping the ‘free’ natural source. But unless the new scheme addresses the pricing of electricity and differential pricing for small consumers, the ambitious scheme is unlikely to take off.
The Budget claimed that FDI inflow during 2014-23 doubled to $596 billion compared to the previous 10 years. This is misleading. FDI inflow as a ratio of GDP peaked in 2007-08 at around 3.5% and never regained that level. Further, as there have been more exits by private equity capital (the main source of FDI) from India, net FDI to GDP ratio is just about 1%. Much of FDI has flown into services and only modestly in manufacturing, and that too for acquiring existing factories and companies, not for green field investment. So, the modest FDI hardly adds to the economy’s fixed investment growth.
The larger picture
The political message in the Budget was ‘all is well’ and the coming days will be better. It seems to ignore many hard facts about the economy and potential threats from the (fracturing) global economy. Despite a satisfactory recovery from the COVID pandemic, the employment situation remains grim, as per official statistics. For example, the Periodic Labour Force Survey data show that regular salaried employment during the last five years has stagnated. Most of the employment generated is unpaid family labour, a clear evidence of disguised unemployment. Real wages in agriculture have declined. These data points tell us that the benefits of the supposedly stellar output growth have accrued to those receiving rents, interests, and profits who form a tiny share of the population or households. Such a growth outcome can hardly be considered equitable or inclusive.
The long term growth of a poor, over-populated economy lies in the structural transformation of its workforce away from rural/agriculture to modern industry and services in urban areas where labour productivity is much higher. During the last 10 years, we have witnessed a rise in the agriculture workforce and a slight decline in employment share in manufacturing. So, what we are witnessing is premature de-industrialisation.
While the Budget and the economic review seem complacent about the aggregate growth and stable external balance, their composition display areas of concern. One such area is the growing dependence on China for industrial inputs. The trade deficit with China has steadily widened over the years, accounting for one-third of India’s trade deficit. Despite ‘Make in India’ and ‘Atmanirbhar Bharat Abhiyaan’, India’s industrial output and investment growth rate has decelerated on a trend basis over the last 5-7 years. The gravity of the problem is better captured by the much-ignored estimates-based Annual Survey of Industries than the macro aggregates in the National Accounts Statistics.
The Budget is an account of the achievements of the last decade of this regime, with a promise to press ahead with the same. It refuses to address shortcomings such as the lack of employment, wage growth, or the critical deficiencies in sectors such as manufacturing. It also seems to ignore potential threats arising from geopolitics or strategic risks posed by dependence on China for critical inputs. Such a head-in-the-sand approach hardly augurs well for long-term national interest.
