On 1st February 2022, the Finance Minister of India, Nirmala Sitharaman, presented the Union Budget 2022-23 as a roadmap for the Indian economy leading up to India’s 100th year of independence. India has great ambitions for the next 25 years but in the near future, the Budget aims to continue to harness the momentum that has made it the fastest-growing economy, focusing on growth opportunities in the green economy and tech industries.
In order to highlight this economic transformation, #IMPRI Center for the Study of Finance and Economics, IMPRI Impact and Policy Research Institute, New Delhi organized a panel discussion on New India’s Economic Transformation and Union Budget 2022-23 under the series The State of the Economy – #EconDIalogue on February 5th, 2022.
The distinguished panel included Dr. A. Amerender Reddy, Principal Scientist (Agricultural Economics), ICAR-Central Research Institute for Dryland Agriculture, Hyderabad; Prof. Nilanjan Banik, Professor and Program Director, School of Management, Mahindra University, Hyderabad; Dr. Radhika Pandey, Senior Fellow, National Institute of Public Finance and Policy (NIPFP), New Delhi; V. Ramakrishnan, Managing Director, Organisation Development, Singapore. The event was chaired by Prof Mukul Asher, Former Professor, Lee Kuan Yew School of Public Policy, National University of Singapore.
Budget 2022-23 Follows the Agile Approach
Prof. Mukul Asher started the discussion by highlighting the importance of the union budget, laying down the context of budget 2022-23. In doing so, he states that the unveiling of India’s union budget is the single-most substantive event of the year, this is when the stock of the immediate past economic and financial performances are taken and fiscal trends, scenarios, and initiatives for the future are reviewed. He also attempts to highlight the significance of the economic survey. The 442-page survey this year, presented on 31st January, followed what is called the agile approach to addressing Covid-19 pandemic challenges while reviving the economy.
Explains the agile approach, which informs India’s economic response based on feedback loops, real-time monitoring of outcomes, flexible responses, and safety-net buffers. Moreover, the survey’s GDP forecast is a range of 8 to 8.5% for the year 2022-23, which, according to Prof. Asher is progress in economic reasoning. This approach is facilitated by another document which is basically a revamped statistical appendix that has five separate tables of high-frequency indicators such as new subscribers to the employees’ provident fund, monthly GST revenue, domestic air traffic, and so on.
Talking about the budget proposal this year, Prof. Asher highlights the emphasis on process reforms that are designed to reduce transaction costs and comprise simplifications of the processes where government involvement is essential. Focussing on Chapter 11 of the survey titled ‘Tracking developments through satellite images and cartography,’ something that has been neglected in the past. This makes use of new technologies to obtain accurate and timely data for policymaking.
Particulars of Budget 2022-23
Dr. Radhika Pandey takes the discussion forward by giving a preview of the key takeaways of the budget. She points out that private investment has remained weak since 2011-12 and this has driven the government to provide a push to Capex to promote infrastructure, job creation, and growth. While doing so, they have also tried to keep an eye on fiscal consolidation. In this context, she opines that the government is on track to reducing the fiscal deficit to 4.5% by 2026.
Providing a brief outline of the ways in which the budget attempts a big push to Capex. In this context, she mentions the increase in capital expenditure by 35.4% to Rs. 7.5 lakh crores to continue public investment-led recovery. This, coupled with the Grants-in-aid for the creation of capital assets leads to the Effective Capital Expenditure to be around Rs. 10.68 lakh crores. The main medium through which the government plans to spend this capital expenditure is the Gati Shakti Master Plan which is a digital model that aims to bring the 16 ministries for integrated planning and implementation.
She also points out that there is a big push in the construction sector as highlighted in the budget. This push is seen not only for the construction of highways but also the ropeways and rural roads. All these schemes not only have the potential to increase employment but the fact they have both forward and backward linkages imply that there will also be an increase in the demand for raw materials and a consequent employment growth in the other sectors.
The other important highlight, as mentioned by her, is the extension of relief to MSMEs, especially through the credit guarantee schemes and revamping the CGDME, the entity which provides this guarantee. In this regard, she talks about the extension of the Emergency Credit Line Guarantee Scheme or the ECLGS till March 2023.
She then looks at some preliminary studies that point toward the benefits of these ventures. In particular, she talks about a study by the State Bank of India which says that around 14% of outstanding MSME loans were prevented from becoming NPAs by this credit guarantee scheme. She also highlights the tax rationalization measures introduced to promote Make in India, the domestic industry, and also to promote private investments primarily the extension of the subsidized corporate tax regimes.
She also points out how this year’s budget does not seem to contain populist measures but instead is more growth-oriented, promoting employment creation and infrastructure. Further, the outlay on subsidies, in her opinion, has also been pruned for both food and fertilizer, as well as for petroleum. Pointing towards the next highlight, she states that the projection of the estimates has been kept on a conservative scale for the next fiscal year even though a point growth in revenue is evident. In this regard, she talks about how the tax revenues are projected to increase by 9.6% and the non-tax revenues are expected to shrink.
The historicity of Budget 2022- 23
Dr. A Amarender Reddy then continued the discussion by talking about how the Indian economy has transformed over the last 75 years. He states that post-1947 the country was very poor and it was then that the government began focussing on the public sector through the trickle-down effect. This process continued till the 1980s when the government realized that its efforts are not visible in the private sector. As a consequence, during this period there was a shift in the policy towards more liberalization and direct transfers to poverty alleviation programs.
However, according to Dr. Reddy, even right now, some of these age-old problems are still there. Consequently, the divide between the haves and have-nots has increased manifold from the 1990s to the 2020s. Keeping this in mind, the government of India started to build on the safety nets like direct money transfers, food, and fertilizer subsidy, drinking water subsidies, MGNREGA, etc. on the one hand, and infrastructural development like highways on the other.
To create a balance between these, the government of India came up with a push for digital infrastructure. This will rejuvenate the interlinkages between different sectors and energize the small and macro enterprises. Overall, according to Dr. Reddy, therefore, this budget is pro-private sector and pro-infrastructure, creating a very strong base for India’s digital infrastructure at least for the next few years.
The Good and Bad of Budget 2022-23
Prof. Banik then listed the good and the bad points of the budget and suggests what the policymakers can do to make the budget more impactful. The first point he makes in terms of growth is the increment in capital and revenue expenditure, the former increasing from INR 6 lakh crores to INR 7.5 lakh crores, from 2.2% of GDP to 4.1% of GDP.
He also mentions the tax rationalization in terms of bringing the input tariffs which go into the production of the final output. The outcome of this increment is the hope that this is going to bring about ease in doing business, by building more roads and ports. This will also lead to a spurt in manufacturing, which will, in turn, lead to employment creation.
Highlighting the potential bad points of the budget, Prof. Banik first talks about the consumption expenditure. He also talks about the land acquisition which is outside of the purview of the central government. Talking about the increment of fiscal deficits to 6.8%, Prof. Banik states that there is a possibility of inflation. Therefore, in terms of growth, Prof. Banik rates the budget an 8 out of 10.
In terms of development, Prof. Banik once again highlights the good and the bad parts of the budget. In defining development, he says that while growth only looks at the growth of GDP, development involves other indicators, for example, education, health, and distribution of income. The first point under the good aspects of the budget, according to Prof. Banik, is the increased allocation for housing and piped drinking water.
The other good thing is the emphasis of the government on building rural roads. In the agriculture sector, in summation, Prof. Banik states that there is a push in terms of irrigation and building more cold storage and food processing units. He opines that this budget will have a positive outcome in the development sector in terms of poverty reduction and reduced child mortality.
Again, highlighting the bad points of the budget, Prof. Banik mentions the closing down of primary schools and lowering of exam standards which in turn leads to the lowering of learning outcomes. He also talks about income inequality and gives an overall rating of 5 out of 10 for this sector.
Prof. Banik then lists down some innovative interventions in order to make the budget more impactful. He first talks about the Plug and Plays infrastructure in which the government develops a portion of land and asks the private parties to set up industries. This model is followed in Vietnam, Cambodia, etc. It benefits the government as well as the private parties as they are provided with water, electricity, internet, etc. by the government. The other suggestion he gives is combining independent social activities with government social welfare programs. Finally, he also talks about creating a venture or private fund for the Ministry of Micro, Small, and Medium Enterprises.
V. Ramakrishnan then took the discussion forward by pointing out how transformative the budget has been especially from the point of view of manufacturing. He states that the ICOR in the manufacturing sector is nearly 6 which means capital going into manufacturing is not as productive as in the other service sectors. In his opinion, the budget cannot be very beneficial in and of itself if the manufacturing itself is very inefficient and non-productive. He goes on to say that manufacturing takes up around a quarter of our GDP, and around 33% of India’s manufacturing output provides massive employment and that, in his view, is the singular feature of manufacturing that needs to be worked towards.
Marking the graph on the screen, V. Ramakrishnan then points out how insignificant the MSME contribution in India has been. On a different comparative graph, Sir also shows how it has not been a significant employment generator- with 8% of revenue and 21% of jobs.
Therefore, in his opinion, the issue of transformation is that manual working and labor are not enough, mechanisation and automation are required. In summation, he states that the majority of the MSMEs in India are small and undercapitalized, and clueless about markets and customers. Further, the factor productivity in Indian MSMEs is extremely weak, and the economic value added overall is very poor.
There is a need to shape policy where the economic value-added benefits the rest of the citizenry. He also touches upon the triple-E model in manufacturing: Economy, Efficiency, and Effectiveness. In his opinion, unless the government delivers on all three fronts, it will impact the value of money. He then lists down the biggest challenges in the manufacturing industry. In this regard, he talks about the lack of money in market development and customer management.
He opines that appropriate skills are more important than skills per se and that skill development has to be really targeted. V. Ramakrishnan then draws a comparison of Indian MSMEs with the models followed by Japan and Germany and talks about how India must learn from them to develop one that suits its interests the most.
In conclusion, Sir states that knowledge, capability, and competence are valuable resources but they are not available in plenty in the country and the policies should be directed towards developing them. Manufacturing, in his opinion, therefore, can be transformed but there is a need to take a step back and evaluate to see how the industry can be productive a few years down the line. In this context, he states that while the budget is very encouraging, it needs a hard relook to facilitate what is going to be a very important sector for India.
Prof. Asher then concluded the event by saying that more research is needed to conduct a state-by-state analysis of the budget. He also highlighted the fact that India is now planning to issue its own digital currency and it will tax the other cryptocurrencies. He also talks about how the budget speech did not mention much about the external sector even though the two major parameters of growth are likely to include exports and capital expenditure.
Finally, he also mentions the importance of credibility in the budget documents. In conclusion, Prof. Asher states that he will give very high marks to the budget as to what it has proposed for the current financial year. He opines that this has to be sustained and implemented properly and that empirical observations and monitoring and evaluation have to constantly be made.
Acknowledgment: Palak Bothra is a research intern at IMPRI.