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India’s new budget: much fanfare, missed opportunity -Happy Pant and Sarah Farooqui

-CBGA Blog

India presented its latest Union Budget (for FY 2022 -23) in early February amid much hope, as the country is still reeling from the aftermath of Covid-19 pandemic, which has lasted for two years.

To deal with the pandemic induced socio-economic crisis, countries across the world  have been announcing policy measures outside of their annual budgets. The Indian government, too, made many such announcements, but given the scale of the crisis, the fiscal response has been inadequate. Even when compared  to the policy measures announced by other countries, India’s fiscal response  has been on the lower side. Thus, the expectations from the annual budget were high, as it was expected to compensate for the inadequacy in the earlier policy announcements.

Looking at the nominal size, total government spending in India is the second largest in the global South after China. It is bigger than even large middle-income countries like Brazil and Russia, both of which have much higher per capita income and per capita government spending. For an economy of India’s size, there was expectation that the latest budget not only help redress the mounting social crisis and enable an inclusive recovery within the country, but also lead the way for implementing innovative and effective policies to deal with such crises in other middle and lower-income countries around the world. Unfortunately, these expectations have largely been dashed.

For one, total government expenditure has been proposed to increase by 13 percent compared to the previous budget, but this increase is much smaller in real terms, after adjusting to remove the effects of inflation. As a share of GDP, the government expenditure is actually set to drop, despite a slight increase in total government receipts.

With the size of the budget increasing by just 4.6 percent of last year’s revised estimates, which is lower than the rate of inflation, which reached 5.6 percent (Consumer Price Index based) in December 2021 (Economic Survey of India, 2021-22), the budgeted total expenditure change is negative in real terms. This would have a dampening effect on the economy, when the need was to expand public expenditure. India desperately needs a social welfare and rural infrastructure investment drive to combat the crisis of aggregate demand. Towards addressing the challenges, and recovering from the pandemic, total government expenditure in India,  was around 4 per cent of GDP last year according to the Financial Transparency Coalition joint report, but some of this was not new spending.

If one looks at the composition of total expenditure, the budget envisages a sharp rise in the capital expenditure, by around 25 percent of previous fiscal year revised estimates. Revenue expenditure, however, is projected to increase by a mere 0.9 percent. Capital expenditure is concentrated in ministries and departments like telecommunications, atomic energy accounting, defence, railways, road transport and highways, housing and urban affairs. Given the high capital intensity of many projects in these sectors, the potential for employment generation is likely to be somewhat muted.

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