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Tuesday June 28, 2022

Rituals and Epiphany of the Union Budget

economic growth union budget

Simon Smith Kuznets, the second Nobel laureate in economics, had mentioned “the capacity of a sector to contribute to economic development does not depend on itself”*. This means if a country targets an overall economic growth rate of 5% having two thirds of the economy in the rural sector, then with a 2% growth in this sector we will need a forty two percent growth in the industrial sector to achieve the desired target. However, if agriculture grows at 4%, then with an industrial growth of 8 % an overall growth of 5 % is possible.

Four decades later the idolator of the sixth five-year plan, Raj Krishna concluded, India had a “Hindu rate of growth “of three and a half percent only, primarily because we had placed an emphasis on the modern sector, comprising the private and public sector which we assumed would push the economy northwards. This strategy was wrong, as it was very capital intensive – absorbing only 10 % of the labour force. Moreover, the occupation structure in India had not changed with the majority of the population drawing their livelihood from agriculture. He reiterated that as 6 million youth were reaching working age every year, then even with one hundred percent growth of modern sector and doubling of production, the capacity of this sector to absorb unemployment will go up from half a million per year to one million only.” A dog can’t wag its tail but a tail won’t wag a dog”! Thus, he stressed, a strategy of integrated rural development is the only answer to the problem of growth with equity; structural stasis; underutilization of capacity; and disguised unemployment.

Economic growth comparison

Australia is a developed country having stressed on integrated rural development. A four percent growth in agriculture, will yield a doubled rate of growth in the industrial sector. What is the industry that will not get the necessary fillip to grow? From processing to packaging; cold storages to credit facilities; banking digitalization to technological upliftment; electric power to processing; transport to communication; health care to hospitality; education to research and development; import substitution to export promotion; capital intensive development to capital extensive development- IRDP will provide the stimulus to all sectors.

The Atmanirbhar Bharat program is a strategy that addresses this thrust. Additionally, the stress on the MSME sector -which comprises the majority of businesses – will enormously benefit the growth of industrial output. India’s unemployment problem and economic growth will therefore be addressed. The fiscal stimulus in the proposed budget will have a 5.5 trillion capex for financial year 2022. Expenditure on infrastructure is social overhead capital which though essential has a very strong inflationary potential. Expenditure on this front, has multiplier effect on income generation. However, project delays will only sabotage planned expenditure and lead to higher rates of inflation.

As it is gross market borrowings is pegged as 12 trillion rupees, this has a high inflationary potential. Income multiplier is highest on such public debt. This is known as the “Please effect”. Apart from borrowings, the government targets a disinvestment revenue of 1.7 trillion rupees against 2.1 proposed earlier. Divestment achieved only 32 thousand crores. As a fall-back option, to ensure assured revenue returns, the government intention for privatisation has also been clearly expressed. Two PSUs and one general Insurance Company has been targeted for divestment in the Financial year 2022.This is an inevitable step for want of adequate fiscal stimulus.

Let’s take the fiscal stimulus of some countries and compare with the contraction. USA eleven per cent of GDP, Japan ten-point four percent of the GDP, China five-point five percent of their GDP, Brazil eight point six per cent of GDP, Russia six-point five percent of the GDP, India four percent of the GDP. We couldn’t push it as much as all other countries in terms of percentage. All countries shrunk. USA three point four per cent contraction, Japan five-point one percent contraption, china didn’t contract but is expanded slowly two-point three percent, Brazil four and a half per cent contraction, Russia three-point six percent contraction, India eight per cent contraction. So, where as we couldn’t put the money and primarily because of that Indian economy shrunk by eight percent.

Low Fiscal Stimulus







Obviously, there was an economic hit owing to COVID-19 and India was no exception. People lost jobs, businesses collapsed, with factories and workplaces shut down due to lockdown imposed in the country, millions of migrant workers had to deal with loss of income, food shortages and uncertainty about their future. Thousands of them then began walking back home, with no means of transport due to lockdown. The Government had to divert resources for rehabilitation, relief and health care.

While the government could not tax more, it is evident that in the ensuing budget they could not provide the relief to taxpayer either. Then, where did the revenue come from to meet the expenditure? In comparison to last year, when borrowing and other liabilities accounted for 20 % and expenditure on account of interest payment was 18 %, the economic survey indicates that borrowing and liabilities increase to a whopping 36 % while interest payments increased to 20 %, this means government debt has increased enormously and fiscal deficit has gone up to 9.5 % much more than in 3.4% in 2018-2019. The problem with borrowings is that on one hand, the repayments will start after 5 years, so we have to ensure it is productively utilised.

In the next part I will discuss the arithmetic of the budget, revenue deficit logic and divestment, problems and possibilities.

*The data provided by the author has not been verified by
Image courtesy: Pixabay

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