This growth strategy had two prongs.
One, incentivise the private sector in the economy to invest in the productive capacity and thereby create jobs and push growth.
The second part was about the government’s role in the economy. Here, the mantra has been minimum government. That, in turn, meant increasing the capital expenditure on the one hand, and raising more revenues via disinvestment and privatisation on the other. This was done to ensure that the government maintains fiscal prudence and doesn’t splurge on populist schemes.
The government has largely stuck to this theme over the past four years, and Wednesday’s budget suggests that it is in no mood to reconsider.
What is the current state of the Indian economy?
The first thing to remember is that even before Covid, the Indian economy was suffering from a secular deceleration in growth. In the financial year 2019-20, which ended in March 2020, the economy grew at 3.7%. RBI’s research shows that India’s potential growth rate — that rate at which it can grow without inflation becoming a problem — has been falling over the past two decades. In the 2003-08 phase, which was India’s highest growth period ever, the potential growth rate was 8%. Between 2009 and 2015, it fell to 7%. As the Economic Survey said, by the time Covid hit India, the potential growth rate had fallen to 6%.
Over the next three years — FY21 to FY23 — the economy suffered a technical recession as well as a protracted period of high inflation. The First Advance Estimates (FAE) of national income (read GDP or Gross Domestic Product) that were released on January 6 give a good understanding of how the economy is placed at the end of FY23.
The GDP is calculated by looking at the spending by four different segments of the economy. Of the four main engines of GDP growth — private consumption — which refers to what Indians spend in their personal capacity, be it on buying a fridge or an ice cream — accounts for 56% of GDP. These expenditures had grown by just 8% over the FY20 levels.
Finance Minister Nirmala Sitharaman ahead of Budget presentation in New Delhi on Wednesday. (Express Photo: Gajendra Yadav)
The second biggest engine for growth (accounting for 33% of India’s GDP) are the expenditures towards investments, which involves firms, both big and small, and the government’s spending on creating productive capacity, such as building a road. These were up 15% over FY20 levels.
The third engine (accounting for 11% of GDP) is the everyday expenditures of the government (such as salaries). This spending is expected to be just 7% above FY20 levels.
The fourth engine is called Net Exports (Imports minus Exports) and since imports are higher than exports, this has been pulling down the GDP, especially as exports have faltered due to the global slowdown.
This data show that there is all-round weakness in the economy. Most economists have argued that the biggest problem is that private consumption is weak. That’s because people have been suffering one blow to their income after another, and this has over time led to tepid demand. In the absence of demand, businesses have stayed away from investing heavily. Even the modest 15% increase over the past three years is largely towards replacing old investments, not making new ones.
What has made matters worse is the global slowdown. “Over the past two decades, India’s growth cycles have got increasingly synchronised with that of advanced economies since the 2000s due to enhanced integration of trade and capital flows,” stated a recent research note by CRISIL.
What has the Budget tried to achieve in this situation?
Faced with slowing domestic growth rate, global recession fears, persistently elevated prices, unemployment worries, high fiscal deficit, and a general election in the next 14 months, Sitharaman decided to stay the course with the strategy she adopted in 2019.
As such, she did two things.
Raising capital expenditure: Capital expenditure is the money that is spent on building productive assets such as roads, bridges and ports. This has a greater return to the economy, and every Rs 100 spent leads to a Rs 250 gain for the economy. Revenue expenditure, on the other hand, returns less than Rs 100.
The Budget has raised capital expenditure by the government to Rs 10 lakh crore — this is more than double the Rs 4.39 lakh crore of 2020-21.
Sticking to fiscal prudence: The FM has assured that the fiscal deficit (market borrowing by the government) will fall to 5.9% of the GDP. This is expected to have a salutary impact on the broader economy, as it suggests that money will be available for private entrepreneurs to borrow and invest.
Apart from these, she announced a decision that surprised many.
New Personal Income Tax regime is now the default: Salaried Indians were expecting some relief on the income tax front. The FM provided it — but in the so-called new personal income tax regime, which was introduced in 2020 but did not have many takers. The FM has used the incentives to popularise the income tax regime while also declaring that it will now be the default scheme. Until last year, it was optional, with the proviso that once you adopted it you could not go back to the old income tax regime.
Some argue that a shift to the new regime — which allows anyone earning upto Rs 7 lakh per annum to avoid paying any income tax — will free up money among the less well-off, who have been the hardest hit, to spend.
If this spending impulse is strong, the hope is that the combined result of these measures could help kickstart the virtuous cycle of growth that the government has been aiming for since 2019.
Will the Finance Minister’s Budget strategy work?
The Economic Survey released on Tuesday made a tacit admission that between 2014 and 2022, India’s economy hadn’t grown at the rate it was expected to. The Survey blamed unexpected shocks such as Covid pandemic and the war in Ukraine, apart from the old problems of banks being saddled with non-performing assets (loans that are not getting repaid) and companies that took on too much debt.
It argued that 2023 would finally change India’s fortunes, and that for the remainder of the decade, India would see a growth surge similar to that witnessed from 2003 onwards.
In other words, on paper, this strategy should work.
The Budget makes some sound choices. “I think the government has got the broad priorities correct,” said Ravi Srivastava, Professor and Director, Centre for Employment Studies at the Institute of Human Development. “For instance, capital expenditure has a good mix of low-income housing and green energy initiatives,” he said.
These projects have a low gestation period and can create jobs quickly, Srivastava said. However, he expressed concern that the Budget doesn’t focus on social security initiatives, something that is also central to the G20 theme.
On the broader strategy that the tax cut would boost consumption among the salaried class, N R Bhanumurthy, VC of Dr B R Ambedkar School of Economics, said that it might have only partial impact — and may not be enough to encourage domestic companies to invest in boosting capacity.
Bhanumurthy expressed concern that the new tax regime’s push towards consumption may hurt India’s savings rate. A key reason why the old income tax system had so many exemptions was to incentivise savings of different kinds.
The household savings are the most important source of loanable funds in the economy. “It is because of this that bank and insurance stocks fell sharply,” he said.
Pronab Sen, former Chief Statistician of India, said the most important bit of investments that are held back are from the so-called MSME (Medium, Small and Micro Enterprises) sector. “There’s nothing much for MSMEs,” he said.
Sen too was concerned about household savings in the economy. “Savings are already down because households have cut them to fund consumption,” he said.
In 2019, when the government was re-elected, the economy was going through a significant slowdown. At that time, several economists asserted that it was a demand-led slowdown. Consumption demand was down because unemployment was at historic highs and growth had been faltering for the third successive year.
However, the government saw the slowdown as a supply-led slowdown. As such, it started on a path where instead of boosting consumption by giving a tax relief — either on income tax or on GST — it gave tax relief to corporates.
Since 2020, consumption levels have been further hit due a host of factors ranging from Covid lockdowns to job losses to inflation. Not surprisingly, the supply-side strategy — read greater investments by firms — hasn’t happened. The slowdown in global growth has made matters worse.
In other words, while the government has a sound strategy on paper, its task is cut out.
Union Budget 2023: All you need to know
Finance Minister Nirmala Sitharaman presented the Union Budget 2023 in Parliament Wednesday. This was her last full-fledged Budget before the 2024 Lok Sabha elections. (Illustration: Mithun Chakraborty) 
Finance Minister Nirmala Sitharaman ahead of Budget presentation in New Delhi on Wednesday. (Express Photo: Gajendra Yadav)
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