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From a major push for capital expenditure and announcements related to virtual assets and digital currencies, to not acknowledging the distress in the economy and moving away from disinvestment, in this episode, Indian Express’s Udit Misra joins host Shashank Bhargava to discuss everything you need to know about the Union Budget 2022.
Shashank Bhargava: Hi, I’m Shashank Bhargava and you’re listening to 3 Things, The Indian Express news show.
Yesterday, Finance Minister Nirmala Sitharaman announced the budget for the year 2022-2023. This budget came at a time when India’s third COVID-19 wave is slowly coming down, and the country’s yet to fully recover from the effects of the pandemic. People’s incomes have been hit over the past few years, consumption has reduced, and unemployment has continued to remain at a very high level, especially among the youth.
In this episode, we will discuss the highlights of this budget, including those related to virtual assets and cryptocurrencies. And we will also talk about why in many ways, there were no major takeaways for ordinary income taxpayers, and how the budget did not provide any major support to those at the bottom of the pyramid who have been the most affected by the pandemic.
And for this, we are joined by Indian Express’ Udit Mishra who writes on the economy and for the newspaper’s Explained section.
Udit, there is a lot that is being talked about this budget, but to begin with, could you tell us what, according to you was the biggest highlight of this year?
Udit Mishra: Yeah. So, I mean, I think the highlight for, I guess everybody in this budget has to be the capital expenditure push by the finance minister.
That, in simple language, means that typically government budgets, if you go back even 3-4 years ago, 88% of all government expenditure was on the revenue account. Revenue account would basically mean all day-to-day expenditure and only about 11-12% is on capital expenditure, which is creating new assets. Making a new road, a new school, bridges, whatever.
And this time, what they have done is that they have given a massive push to capital expenditure. So as against just 11 or 12% of the total expenditure, it has now gone up to 18 odd percent of the total expenditure. And our total capital expenditure has gone up to 7.5 lakh crores, which is just about double of what it was in 2019-20.
So this massive push basically is the highlight of this budget. And there is a government strategy to pull India’s economic recovery into a higher path through this government expenditure.
Shashank Bhargava: And one of the things that we have talked about in previous episodes of the podcast as well, is that when the government does capital expenditure, when it constructs things like roads and bridges, it’s not only creating assets, but it’s also creating employment.
And through that, you’re giving money to the people. Is that how the government wants to revive the economy?
Udit Mishra: That’s true. So typically, you know, if you look at it from a very academic point of view, it is always considered that if the government was to spend money on capital expenditure, it gives you better returns for the economy. The GDP goes up by a bigger amount.
Most studies suggest that in India, if you spend 1 rupee on capital expenditure, then the GDP will go up by 2.5 to 4.8 rupees, depending on whether the period is one year or seven years or whatever. So over a period of time, it will go up between 2.5 to almost 5 rupees.
Whereas if you spend money on revenue expenditure, then most of that money, suppose 1 rupee you spent, you’ll only increase the GDP by half a rupee or less than one rupee. So that’s the big difference. And that is why on paper, capital expenditure makes a lot of sense for any economy, for any government to be spending on that.
Shashank Bhargava: And the other thing that the government is hoping is that this capital expenditure will bring in private sector investment. Could you explain how that will happen?
Udit Mishra: Yeah. So see, this is how the government plans to hope that this strategy will work. We have been seeing that India’s economy since 2017-18 had been losing its growth momentum, and latest data reveals that in 2019-20, that was the first year of the second Modi term, our economy grew by just 3.7% in that year. And that was the year just before COVID.
And then the COVID hit. We had a contraction in the economy and then in this financial year, which is just about to end, we recovered that ground to a great extent, and that is how we are. But in this whole process of slow down and everything, there’ve been job losses, there have been rising unemployment, incomes have been hurt, expenditure levels have fallen. And the more you get into disaggregated data, the more you realize that we have had a ‘K’ shape kind of recovery, where the weaker sections have lost a fair amount of their spending ability.
So in such a scenario, that big engine of growth, which used to come from the GDP, that used to come from people’s spending, was really struggling.
And government finances, as we know, are struggling because of fiscal deficit that was already over extended.
Shashank Bhargava: For those who may have forgotten, fiscal deficit is when the government’s expenditure is more than its revenue. And the Indian government’s fiscal deficit has been specially highest since the COVID 19 pandemic.
Udit Mishra: So government has decided that let’s put money in investments, create more capital assets, which increase the productive capacity of the economy and the government hopes that when investments are made, people will get jobs. Other private sector companies will find that there is reason to invest by themselves. As more and more people get more and more money, their demand from the economy will increase and more private sector firms will find it very reasonable to continue to invest more.
And through that virtuous cycle will be created where more and more investments, more and more growth will happen. So that is the government’s bet in this budget that by investing right now, it will give these deep dividends in the times to come.
Shashank Bhargava: Okay, so the capital expenditures is what the budget has focused on this time.. But the other thing that a number of people, including you, have pointed out is that this budget does not acknowledge the distress in the economy and the extent to which people have suffered. Especially the poor who have been the most affected by job losses in the pandemic.
You know, people have said that it does not acknowledge the ‘K’ shaped recovery, meaning that different sections of the economy have recovered at starkly different rates. In what way can we see that in the budget?
Udit Mishra: So it is conspicuous by its absence, actually. Those kinds of measures. For example, 2022 was the year when farmers’ incomes were supposed to be doubled. That was the promise made five, six years ago. And we’ve just come out of a farmer distress, farm laws were finally repealed. And especially with the elections in the offing, there was some expectation that perhaps the government will, even if it’s not a very significant amount, perhaps increase some kind of a direct benefit transfer or cash transfers that come under PM Kisan, that amount might be increased from 6,000 to maybe some 7000-8000 or whatever amount, but that didn’t happen.
Similarly on many other areas, for example, the subsidized food that government was extending to those who are poor and it was around 80 crore people out of the total population, almost a large chunk. So that scheme also will expire in March and it will not be extended to the next year. Now for a lot of people with the kind of stress that they’ve faced, basic food rations were tremendous value.
They may not be enough for them to lead a very healthy life, but under the circumstances they were of some value. So we did not see that happening. And it sort of gives an impression that government is unwilling to admit that there are very deep scars, that there is a K shaped recovery.
There is a notion that everything is now sorted, COVID is behind us.And we can just move on from here, but this is quite far away from the truth and it will have its repercussions when the growth recovery process starts in the coming year.
Shashank Bhargava: And in fact, in this regard, even MGNREGA, which is the scheme through which millions of people every year get unskilled jobs, the allocation of that has also gone down. Right?
Udit Mishra: That’s another example. So if you look at any of these food subsidy bills, fertilizer subsidy bill, or NREGA allocation, all of them have come down in the budget estimates. Even fuel subsidy, everything is coming down. So the point is that under normal circumstances, most of us would say, you know, there should not be subsidies, efficiency and everything, but these are not normal times actually. And huge proportion of India’s population is actually struggling. And if the government does not spend directly on those areas, then the people will be forced to spend.
Either they would not have the money or they would have the money and spend it and then not have the money for something else. So some way or the other, this will hurt the poorest the most.
Shashank Bhargava: Okay, so the budget is not really helping out the poorest in the country, but the other thing is that there were also no major changes for the ordinary income tax payers. The government has said that they have not increased taxes because it has been a hard year on people, but there is also not much that income taxpayers or even the middle class can look forward to. Right?
Udit Mishra: Yes, that was again, another example of government unwilling to go back on its stance, very aggressive stance, that everything is okay. Things are fine, and we are just moving ahead after COVID. This expression that I could have taxed you more is bizarre at one level because of the realities that is happening outside in the world.
So many salaried people having lost the jobs or income losses happening. A massive amount of uncertainty in the job market. So it’s quite remarkable that the government has taken that kind of a view that instead of an income tax cut, relief, they’ve been talking about income tax increases not happening.
But at another level, one must also understand that there is, this is now an annual thing, that there is an expectation for income tax labs to be tweaked. And it can not happen on an annual basis. While it doesn’t happen all the time, but it’s also true that expectations that income tax slabs would be tweaked all the time, every year, are also quite unrealistic.
Shashank Bhargava: Okay. So if the government is not really providing relief to the poorest and those in the middle class, then is the government relying heavily, or even solely, on capital expenditure to provide relief to people? You know, for capital expenditure to increase people’s incomes and therefore expenditure?
Udit Mishra: Yes, there is a considerable amount of criticism of the government in not accepting that, that there was a slow down. So as I mentioned earlier, there was a slow down since 2017-18. And for the longest time, till COVID actually came and there was a contraction, government never accepted that there was a slow down. And on the off chance that they accepted that there was some kind of a problem. Their solution was the wrong diagnosis of the reason of the slowdown.
Slowdown was always demand side. People were demanding less because they were earning less and things were just coming to a halt. As we saw with a 3.7% GDP growth rate in 2019-20. And that was the reason why people are slowly demanding less. Whereas the government’s reading was that this is a supply side slow down. What is the supply side slow down? Is when you’re saying that the businesses do not find enough reason to increase the supply or things are holding them back. Higher taxes are holding them back from investing or business rules and regulations are holding them back from increasing supply.
And so what they did was that they gave a corporate tax cut, which if I remember correctly, it resulted in revenues coming down for the government by 1.5 lakh crores. So, it was bizarre, you know. If they had read the situation, right, they could have used 1.5 lakh crores, taking it from the companies at that time and invested it in such a manner or spent it in such a manner that boost demand. Either by directly giving the money or doing what they have done today, increasing capital expenditure.
But at that time they didn’t do it. They gave the corporate tax cut in 2019-20, and that money was simply pocketed by the companies. They did not increase investments, they simply paid off their debts or improve their bottom line. And that’s where the government has been getting this strategy wrong. But today, obviously it’s a government capital expenditure led strategy.
And their hope is that this whole virtuous cycle, as I mentioned earlier, will take over and that will create jobs, but then also lies this whole criticism of the Government that right now people need help here and now. Absolutely immediately. A large section of it. And they cannot wait for the whole virtuous cycle to take place, to give them jobs, to give the money and things to grow.
Shashank Bhargava: And also Udit, this budget has come just before the assembly elections are about to take place in five states, including UP, which is especially important for the BJP. With this approach of not addressing the distress of the poor, some are saying that it could mean that the government is confident that it will win these elections. Meaning that it does not feel the need to give the relief right now. Can we see it that way?
Udit Mishra: Yeah, I would not like to speculate on the political reasoning or why the government might be doing this or not acknowledging the stress. Part of the thing I feel is that, uh, no government wants to accept that there is such deep distress in the economy because once you accept that it starts unraveling for the government because a lot of people will start asking questions. What the government did or didn’t do, or they did incorrectly.
And just as some people are speculating that this could be a reflection that the government is so confident of winning all the elections, that it’s a popularity or the prime minister’s popularity is so bullet proof in that sense, the others can speculate that this is so close to the election that the government might think that maybe they’ve lost those elections or in particular, the UP election, and that it’s too late in the day to be doing anything populist. So that, you know, even if you were to do something it may not alter the result.
So there are speculations on both sides. I would not want to get into that, but there is a genuine economic, and this is a fact, there is an economic distress in the country. All the data that we have, not much from the government because government gets repeatedly saying that they don’t have the data, but all the data that we have points to that. And it cannot be ignored. It will remain a case that aggregate demand will remain weak. If those factors are not addressed or it will become strong only over a longer period of time.And the recovery will get delayed as a result.
Shashank Bhargava: Okay, now the other major announcement that has made a lot of headlines relates to virtual assets. The budget proposed that a tax of 30% will be imposed on virtual assets, which includes cryptocurrencies. And just to quickly explain cryptocurrency to our listeners. A cryptocurrency, just like the rupee or the US Dollar, is a medium of exchange, but it’s in digital form. And it uses encryption techniques to control its creation and to verify it. In traditional currencies, the central bank does that. Like in India, The RBI is the central bank and it is the one that verifies the rupee, provides a guarantee for the rupee, and records the transactions related to it. But in cryptocurrencies, this process is not done by any one single third party. It is actually done by a network of private computers, which are constantly authenticating and recording transactions. And they are doing this using a technology called blockchain. So it’s digital, there is no central third party to act as a guarantee or to verify it, and it uses the blockchain technology. That’s essentially what you need to remember to understand cryptocurrencies. So Bitcoin is a famous cryptocurrency, and so is Ethereum.
In India, like in many parts of the world, cryptocurrencies have been unregulated. They do not come under the direct purview of the government. In fact in the past the RBI has been against private cryptocurrencies. But Udit, now with this announcement of taxing virtual assets, how will it affect this particular space ?
Udit Mishra: So there is a crucial distinction here between cryptocurrencies calling themselves currencies and the Indian lawmakers, creating them as virtual assets, not currencies.
And the finance minister actually made that point that they are not currencies. Currency is still what the RBI publishes and or certifies. Now the thing with the decision to tax virtual assets is that it has led to very counter-intuitive kind of a reaction. Even though many of these cryptocurrencies and their sellers or exchanges have been taxed, they are happy that at least it gives them a certain legitimacy. That the government acknowledges their existence and is working towards a legal setup where their existence will be formal.
So they have obviously welcomed it and it does create a bit of a push towards the stock market. These cryptocurrencies were competing with stock markets in terms of attracting investment. And from what I understand by talking to reporters in Indian Express, there is now with this tax of 30%, perhaps it will make a lot of investors wonder whether they should go for cryptocurrencies or simply put their money in the stock market where the tax rates are lower.
Shashank Bhargava: And so it does give it some kind of legitimacy, even though obviously it doesn’t make it regulated or even legalized, the Government didn’t talk about the cryptocurrency bill, for example. But does it also make it easier to track this space? You know, keep tabs on who’s using it and how it is being used?
Udit Mishra: That’s true. I mean, on the face of it, the government, by saying that we’ll be tracking it now. Although from what I understand, and this is not a space, which is very well understood.The whole charm of the cryptocurrency is, to begin with, was that they were outside the government purview and it was fairly difficult to actually track them down, to actually monitor those changes. That was the original charm of cryptocurrencies to be outside the regular monetary authorities.
Shashank Bhargava: Right. And, you know, besides this in another sort of push for digital currencies, the government has announced a digital rupee or a Central Bank Digital Currency (CBDC), as they’re calling it. Now, this is just rupee in digital form. It is not a cryptocurrency, but it will use blockchain, the technology which is used by cryptocurrencies.
So why do we understand the government has done that? And how is this expected to help people?
Udit Mishra: I think the sense we are getting, and this still early days to understand exactly what digital rupee means and how to wrap your head around it, but I think the sense is that government wants people to familiarize themselves with this whole digital currency format.
They also want a tab into it. You must understand, and listeners must understand, that monetary policy and currency are sacrosanct aspects of any country’s sovereignty. You cannot allow other currencies to run. Otherwise your monetary policy will be compromised. So RBI and the government completely want to be ahead of the curve and ensure that if people are transacting in India, then let it be through digital rupee. So that it’s better monitored and they can address what happens as a result of that.
One of the central concerns of RBI is to understand how much money is there in the economy, and they keep tweaking it up and down. And we remember that in demonetisation, one of the main criticism of demonetization was that the move took away 86% of all money from the economy. In one fell swoop.
So we understand how massively such moves can damage an economy. And we cannot allow any other currency to be a part of the monetary system. So I think part of this is defensive. To ensure that, if there is, if people want to deal with the digital currencies, then let’s give them an option. But also aggressively take a lead on that and familiarize people, and familiarize themselves, to know how to deal with it. How to really run your monetary policy with a digital currency.
Shashank Bhargava: Okay. Now towards the end, we talk about something that actually doesn’t feature all that much in the budget, or at least we don’t spend enough on it, which is health. Now in the last budget, what was really surprising was that the health budget was actually reduced. And this happened during the pandemic, and when India anyway, spends less than 1% of its GDP on healthcare. Did we see a change in health allocation this time?.
Udit Mishra: So the first thing is to update our listeners about what happened to the health allocation in the current year, according to the revised estimates. Because even though the budget estimates put down the health allocation, you know, cut it down by 10 odd percent, their revised estimates show that the health allocation had gone up.
It is very clear now that when the budget estimates were made in February last year, the finance minister perhaps obviously didn’t have a clue that vicious second wave can happen. And as it happened more and more money had to be allocated for health purposes. And as a result, the budget went up slightly.
So it not only went up to make up for the 10% cut that happened, but even went further. But again that’s sad to say that between the revised estimates for this current financial year and the budget estimates for the next financial year, there’s just very little that is different. So it’s largely stagnant. And I don’t want to jinx it like last year to say that this can have massive repercussions because they just don’t want to have another second wave kind of a vicious scenario.
But a pandemic has come and gone it seems, and India has not improved on its health expenditure. And that’s really something that reflects very poorly on us and will hurt us as it has done in the past.
Shashank Bhargava: And Udit, when we talk about last year’s budget, you know, one thing we saw in it was that there was a lot of push for privatization. You know, two public sector banks and one general insurance company were to be privatised. There was also talk of the national privatisation pipeline last year. But this time there was no mention of that. So is the government planning to scale back on those things?
Udit Mishra: So the government has definitely scaled back on the disinvestment and privatisation plans. Although openly they do not say that. They simply say that we can always do higher privatization or more privatization and more disinvestment if we want to.
But the fact remains that for a couple of years, the government has been setting very high targets. And I think this is a broader story in India. A very high disinvestment targets are put, very rarely are they achieved, and then next year again high targets are put.
You can see it as a positive move that, you know, if there is more realism that if we can’t achieve it, why announce it? Or an acceptance that let’s not push it right now because, as many of the listeners might note, that a lot of young people are asking for jobs and they are asking for government jobs. And there is a lot of attention on the government that if it keeps selling off a public sector units, banks, insurance companies, or any such are not recruiting, then where are the public sector jobs? Where are the government jobs? And maybe this is also a move to assuage some of those concerns.
Shashank Bhargava: Okay. So Udit, finally, what would you say is your overview of the budget? Like what do you see when you take a step back and look at it?
Udit Mishra: See, if I think of it as a student of economics and not even think of it as my country or anything, I would really welcome this whole experiment. It’s a huge bet that the government has taken by giving such a star budget where it’s almost like a textbook kind of a thing. Where you’ve kept everything in abeyance, ignored everything else that everybody is telling you about the distress in the economy and said that, well, the textbook says, if you invest heavily, it would lead to this virtuous cycle.
Now in the years to come as a student of economics, I would like to see how that pans out. Maybe the virtuous cycle will happen. Even when the virtuous cycle happens. There might be distress in the immediate short term or else that virtuous cycle may not lift because you know, I’ve done this piece last week also, there are arguments that it may not take off because the capacity utilization is already quite low. These are not normal times. So what works in the textbook may not work in the real life, especially when there is so much distress.
So my final point on the budget is this – As an economics student, I’m quite interested in knowing how this pans out. It’s a huge bet. But I suspect that a lot of Indians may, in the short term at least, suffer as a result of this bold call.
Shashank Bhargava: You were listening to 3 Things by the Indian Express. Today’s show was written and produced by me, Shashank Bhargava, and was edited and mixed by Suresh Panwar. If you like the show, then do subscribe to us wherever you get your podcasts, you can also recommend the show to someone you think would like it.
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