Crafting 21st-Century India, Collaboratively, With Confidence
The Union Budget is a statement of accounts of the Government of India (GoI). Yet a careful reading of it, leaving the politics aside, showcases the roadmap for not just the year ahead, but the next couple of decades. Yes, the Union Budget 2022 has gone beyond the fiscal, using the exercise to spell out the principles of policy engagement and fiscal thinking for building India in the decades ahead.
The Economic Survey 2021-2022 did show prudence in its conservative growth rate indication of 8-8.5 per cent. It also spelt out the positive fiscal efforts so far and the fruits it has borne, as well as the challenges ahead. The budget boldly envisages using trust-based governance to build an Atmanirbhar Bharat. It reposes faith in taxpayers, entrepreneurs, investors and citizens. Hopefully, this construct will cascade down through the policy delivery mechanism.
Refreshingly, this is the first budget in independent India that speaks of ‘ease of living’. If it lives up to the intent, it can address concerns emanating from flight of human capital over the past few years. This budget wants to leverage the demographic dividend to nurture and build an encouraging ecosystem for Young India, for it to leap ahead, to structurally develop an entrepreneurship framework and create new additional jobs. In short, this is a budget that bets big on public and public infrastructure.
*Qualitative Estimates, Pre-budget
In the previous edition of this magazine, I had opined that the practical expectation from the Union Budget for 2022-23 would be that of announcements of governmental investments into infrastructure, and policies that could enhance entrepreneurship and fast-track job-creation. I had said that the budget would indicate governmental spends in infrastructure across the following sectors:
* Civic Infrastructure - Roads, Ports, highways, upgrading the Railways, airports, waterways, water, sanitation, renewable energy
* Social infrastructure - Healthcare, education, digital networks, entrepreneurship, women empowerment, senior citizens care
My estimates of investments through climate change bonds, sovereign green bonds and sustainability-based global equity investments have come true. So no shocks, no surprises. But the alacrity with which these have been announced is welcome.
*Capex Cycle
With the capital expenditure (capex) target expanded significantly by 35.4 per cent, from Rs 5.54 lakh crore to Rs 7.50 lakh crore (about 2.9 per cent of GDP) and the effective capital expenditure in FY 2023 seen at Rs 10.7 lakh crore, the budget lays a strong foundation for generation of employment opportunities, enhancing of incomes and greater growth prospects. This is pure play Keynesian economics. When private investments don’t flow owing to poor demand conditions, the government invests and also borrows more to spend more.
But the fine print of the budget indicates that all the incremental capex may not be fresh funding. For example, interest costs of government borrowings as well as interest-free loans to states constitute a dominant part of it. Moreover, the debt to the tune of Rs 80,000 crore, of entities it owns like NHAI, have not been reflected in the budget details.
For the current financial year (FY 2021-22), the revised estimates peg the fiscal deficit at 6.9 per cent against the 6.8 per cent forecast originally. The buoyant tax revenues give a sense of optimism for this target in the current fiscal. The government has shown its intent about fiscal consolidation by projecting a fiscal deficit of 6.4 per cent for the upcoming FY 2022-2023. This is in line with its commitment to bring the fiscal deficit to 4.5 per cent by FY 2025-2026.
The fiscal deficit is calculated as a percentage of the GDP and is the total money spent by the government in excess of its income. The Fiscal Responsibility and Budget Management (FRBM) Act, in its mandate to the Central government has limited the fiscal deficit to three per cent of GDP as on 31 March, 2021. However the blow of the pandemic led to a sharp increase in the fiscal deficit numbers. The all-time low fiscal deficit was last seen in FY 2007-08, when it was 2.5 per cent of GDP.
*‘India at 100’ Approach
The ‘India at 100’ approach has brought in conversations of development across India and Bharat and on how to reduce the social economic gaps between the two. Urbanisation and its impact on social infrastructure has been given attention. However, this has silently pushed the old narrative of achieving that $5 trillion economy to the backend - if not back burner.
This goal seems to have shifted from the political narrative towards economists to track. In the post-budget presser, the Chief Economic Adviser did observe that India could become a $5 trillion economy by FY 2026 on the back of sustained growth of 8-9 per cent. It was in 2019 when the Prime Minister had set a five-year goal of making India a $5-trillion economy and a global economic powerhouse by 2024-25. Adjusting for the Covid impact of the past two years, it is a fair adjustment of those goals. According to the Economic Survey 2021-22, India is set to become the world’s fastest-growing major economy with a GDP growth of 9.2 per cent in the current financial year and is projected to remain in the range of 8-8.5 per cent in 2022-23.
Taking a long-term view makes this a population-focussed budget, rather than a populist one. Budget making is a thankless job, as those who lead the efforts would know. The budget cannot make everyone happy and does not augur well for any popularity contest. As much as any corporate CFO knows, you can break your back getting it right, or break the bank. It’s a simple choice, of moving ahead with what needs to be done.
*Inclusiveness
This budget is based on the assessment of urbanisation trends that indicate that India will continue to be largely rural even 100 years after independence. Rural India’s purchasing behaviour has been traditionally linked to farm output. This has been recognised in this budget, in its endeavour to boost growth in agriculture and the rural economy.
*PradhanMantri e-Vidya is a scheme initiated by the Government of India and launched under the 'One Nation One Digital Platform'. The objective of this initiative is to ensure continuity of education of children affected by the pandemic and so, obliged to opt for online schooling. In the Union Budget 2022-23, the PM e-Vidya has been allocated a nominal budget to expand to 200 channels, from the current number of 12.
*MSME: The Rs 6,000 crore Raising and Accelerating MSME Performance (RAMP) initiative to rate MSMEs will be rolled out over the next five years. This will assist in building the export competitiveness and productivity of MSMEs. The extension of the Emergency Credit Line Guarantee Scheme (ECLGS) scheme by a year to March 2023 and the proposed increase in outlay by Rs 50,000 crore will help the sector overcome Covid hit businesses.
*Building India
The budget has placed emphasis on strengthening the overall physical, urban, rural, as well as health infrastructure.
The Vibrant Village scheme, to be executed by the Union home ministry will receive additional funds and merger of existing schemes to create better infrastructure in sparsely populated border areas in North India. The activities will include construction of village infrastructure, housing, tourist centres, road connectivity, provisioning of decentralised renewable energy, direct-to-home access for Doordarshan and educational channels, and support for livelihood generation.
*The National Highways Network will be expanded by 25,000 km in FY 2023. The Economic Survey said that road transport is one of the most cost-effective and convenient modes of transportation in India, both for freight and passengers, as it has a high penetration level with door-to-door delivery. The importance of road infrastructure is widely recognised as an impactful tool for socio-economic integration and improvement.
To improve the productive efficiency of capital and human capital, under the aegis of ‘trust based governance’, the upcoming fiscal will also see the launch of Ease of Doing Business 2.0 and Ease of Living indices. These indices will help further reduce the number of compliances where possible and state-central government cooperation to digitise and integrate their systems and to provide single point access for all citizen-centric services.
Recognising the need for a vibrant human capital and to address concerns of mental health, this budget provides for launching a National Tele Mental Health Programme. This is a big step for a new India, which does not shy away from a topic generally considered a taboo.
The impetus for Urban planning is evident in the budget, as it recognises the need for better urban planning in India's megacities, with a focus on sustainable measures and public transport. A high-level committee of urban planners, urban economists and institutions will be formed to make recommendations on urban sector policies, capacity building, planning, implementation and governance.
As part of trust-based budgeting, this budget aims to strengthen tax compliances and allow taxpayers to voluntarily offer additional income and pay tax for it, by filing an updated ITR within an extended period of 24 months, from the end of the relevant assessment year.
*Connections
The PM Gati Shakti scheme envisages connecting India. The Railways will offer new products for small farmers and MSMEs and integrate coastal and the railway network. The ‘One station, one product’ concept will be used to help promote local produce.
Another 400 new-generation Vande Bharat trains will be manufactured over the next three years. The 400 will be in addition to the 102 Vande Bharat trains that are already in the pipeline. The 100 PM Gati Shakti cargo terminals too will be developed over the next three years. Rs 1 lakh crore will be allocated to states, to be used for PM Gati Shakti and other related productive capital investment.
The Centre’s commitment to execute major river-interlinking projects is noteworthy. The draft project reports that laid out implementation plans for five river-interlinking projects have been finalised, including Daman Ganga Pinjar, Par Tapi Narmada, Krishna Godavari, Krishna Pennar and Pennar Cauvery. Successful implementation of these inter linkages will depend on the cooperation of the states concerned and the outcomes could see increased socio-economic prosperity and farm productivity.
*Digital
A completely paperless, end-to-end online e-Bill System will be launched for use by all Central ministries for their procurements. This will enable the suppliers and contractors to submit their digitally signed bills and claims online, and to track their status in real-time and remotely. As much as 100 per cent of India’s 1.5 lakh post offices will be on-boarded on the core banking system in FY 2023.
It has been proposed to have the RBI launch the Digital Rupee, a central bank digital currency (CBDC), backed by blockchain technology. The CBDC will legal tender, issued by a central bank in digital form. It is similar to a fiat-currency issued in paper form and is interchangeable with any other fiat currency (where exchange rates are applicable).
*Sustainability
That India announced its pioneering intent in its Net Zero outlook is evident from the way the nation has adopted renewable sources of energy. The focus to adopt sustainability as a way of life has been further embraced in this budget.
Chemical-free natural farming will be encouraged to safeguard against soil degradation. States will be nudged to revise the syllabi of agricultural universities to meet the needs of natural, zero-budget and organic farming, modern-day agriculture, value addition and management. Natural farming in India is being promoted through a dedicated scheme called the Bharatiya Prakritik Krishi Paddhati (BPKP). The scheme promotes on-farm biomass recycling with a major stress on biomass mulching, use of on-farm cow dung-urine formulations, periodic soil aeration and exclusion of synthetic chemical inputs.
Sovereign Green Bonds will be issued in public sector projects to reduce the carbon footprint in the economy. Green bonds or climate bonds as they are sometimes called, are debt instruments that are used to raise money to fund projects that have a positive impact on the environment and consequently on the climate. In 2021 India issued green bonds worth $16.5 billion. It is estimated that India will need $10 trillion to transition to a carbon-neutral economy by 2070 (the year we have set as our Net Zero target).
The use of Kisan Drones will be promoted for crop assessment, digitising land records, spraying of insecticides and nutrients. The government had recently issued standard operating procedures (SOPs) for use of drones in the farm sector.
Instead of massive capex in setting up EV charging stations and the associated technology-lag to fast-charge those batteries, Battery swapping is an efficient way to charge an electric vehicle (EV).
Such an ecosystem needs a policy framework that will necessitate inter-operability standards (that imply the standardisation of batteries used by OEMs and manufacturers of EVs). The current level of research in battery technology is low, and scattered. The government could have given tax holidays for R&D in this aspect. As a nation, once our roads improve and connectivity across geographies opens up for seamless and joyful travel, EV owners will look to buy the vehicle with the bigger battery so as to eliminate range anxiety, when only 10-20 per cent of the total capacity of the battery is needed for daily use.
*Atmanirbhar Bharat
In defence manufacturing, 68 per cent of capital procurement budget will be earmarked for the domestic industry for FY 2023 up from 58 per cent in FY 2022.
As much as 25 per cent of the annual R&D budget of the defence ministry will be reserved for private companies and startups. This will not only encourage quality competitiveness of the current monopoly of the public sector, but also the overall technological advancement objective of the sector.
Duty concessions have been given for high growth of electronics items to increase electronics manufacturing in the country. Lower tax on new manufacturing units will be extended for one more year till March 2024.
A new legislation will replace the SEZ Act that will cover all large existing and new industrial areas to enhance competitiveness of exports. Rs 19,500 crore has been allocated for the Production Linked Incentives (PLI) scheme for manufacturing a high efficiency module for polysilicon.
*Misses & More
In FY 2021, the Union government had managed to raise Rs 32,850 crore. In the previous budget, the government had announced a disinvestment target of Rs 1.75 lakh crore, with the intent of selling Air India, the Shipping Corporation of India, BPCL, etc. This estimate has been reduced to Rs 78,000 crore. The question is, should one rejoice that we are being realistic about budget projections, or is it an optics-strategy of ‘under-commit and over-deliver’? Either way, it is worth any budget estimate, and hence laudable.
It is to be noted that the budgetary allocation to MNREGA has been reduced by Rs 25,000 crore, even when demand for these jobs exceeds supply. It is also surprising, considering that there were even whispers of an urban employment guarantee scheme. The moot point of economists would be, could the push on MNREGA have continued, instead of the sole reliance on the possibility of capex-led employment generation?
Over the past ten years, the Gross Capital Formation in agriculture and allied sectors has been fluctuating, in relation to the sector’s GVA. While in the corresponding period, public investments remained constant, the wide fluctuations of private investments impacted this. Since there is a direct positive correlation between capital investments in agriculture and the sectoral growth rate, a focused approach is needed to increase public and private investments in the sector. Unless a supplementary to the budget moots the RBI’s idea, this will be a lost opportunity.
Reducing personal income tax and bringing it closer to corporate income tax could have propped up the consumption economy further. Individuals who have borne the brunt of the Covid economy over the past two years anticipated increased standard deductions limits, allowable insurance premium limits and deduction of Covid expenses. So did corporate India.
The Middle class could face an inflationary pressure and may begin to pare down consumption, which may not augur well for the economy in the short term. No encouragement has been given to the middle class for purchasing housing or insurance. While the rich don’t get too impacted by monthly household expenses, and the economically weaker rightfully get subsidies and necessary governmental attention, the middle class can do with better handholding.
An analogy comes to mind. A landline telephone connection was a luxury 40 years ago and even entailed some social prestige. Today, a mobile phone connection with a smartphone is a livelihood tool. Can we learn to decodify our thinking around the ‘middle class’ segment and bring policies to help them too? Else the ‘India as a consumer market’ concept won’t cut ice enough for us to be able to invite FDI!
*Towards the FY 2023
To fund the fiscal gap, we will need to borrow around Rs 15 lakh crore from the bond markets. This is much higher than what the bond markets had estimated and this will push bond yields up, which will be further accentuated if global inflation and interest rates rise sharply.
Can this budget outlay and policy framework lead to a sovereign rating upgrade? I think so, if the execution is flawless and without delays and if there are no more Black Swan events. Time for impact-oriented, time bound-execution. The spotlight will be on the policy makers and the government for regular plan-to-progress updates.
This is a budget that’s long-term focussed and in shaping structural narratives. It’s about Investments, Infrastructure, Incentives, and Intent that can build a robust India. It’s as much about Make-in-India, as Making India!
