A bold attempt at public investment-led growth

The Union Budget begins with a self-congratulatory announcement that India’s domestic output (GDP) is likely to grow by 9.2% this year (2021-22) over the previous year – the highest among the world’s large economies. What is untold is that India’s production contraction in the last year (2020-21) was the worst in the world. According to the Economic Survey, compared to the pre-pandemic year (2019-20), the GDP of the current year will be marginally higher by 1.3%. If the adverse effects of the ongoing wave of the Omicron virus are included, the (estimated) modest growth in GDP may disappear. Thus, it is worth starting with a factually accurate picture that India lost two years of production expansion. In other words, per capita income today is lower than it was two years ago. With respect to sources of demand, the share of private consumption declined by three percentage points to GDP between FY20 and FY22. The government increased its spending to offset the decline, but only marginally; Hence, marginal production expansion. In contrast, the United States increased public spending by about 10% of GDP, and its output increased back!

This year’s budget seeks to increase public investment to 35.4% at current prices over last year’s to raise its share in GDP to 2.9% from 2.2% last year. With grant-in-aid for state investments, the budget is expected to raise the public investment share to over 4% of GDP. The budget is expected to trigger a good investment-based production and employment growth by arguing in favor of the “crowd-in” effect of public investment over private investment. The principle is sound and a welcome change from the previous policy stance. As per the schedule laid down in the previous budget, the budget will have to mobilize resources to finance investment in order to reduce the fiscal deficit ratio in the budget. The important question is whether the additional tax and non-tax revenue (i.e. disinvestment proceeds) will be sufficient to finance the investment plan.

To refresh our memory, last year also there was a demand to increase public investment by almost the same proportion (34.5%). I wrote, “These figures certainly look impressive. The realization of these investments will significantly increase tax revenue receipts, disinvestment proceeds, sale of rail and road assets and the government’s ability to raise resources from the market without raising interest rates for the private sector.” (https://bit.ly/3AWzxKP) It’s exactly the same and for this year as well. In fact, public investment in the current fiscal grew by hardly 0.2% of GDP With the threat of high (imported) inflation (due to rising international oil prices) and rising interest rates (due to the decision of the US Federal Reserve), meeting the ambitious investment target will be challenging, but worth the effort. .

on employment crisis

But the bigger question is how will it address the sharp fall in private consumption (three percentage points to GDP), which is likely to be due to job losses? Promotion of infrastructure may limit the derived demand for labour, as the projects suggested are machinery intensive, not labor intensive. The budget does not directly address the employment crisis caused by the novel coronavirus pandemic and the lockdown. The employment crisis will demand increasing allocation for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and introducing a similar scheme to meet urban unemployment. Instead, what is shocking is that the government has cut the allocation for MGNREGA by 25% as compared to the previous year.

industrial recession

The share of the manufacturing sector in GDP has remained stagnant at around 15% of GDP for quite some time. The annual industrial growth rate has come down from 13.1% in 2015-16 to minus 7.2% in 2020-21. Perhaps the biggest example of an industrial slowdown is the fall in two-wheeler sales. According to news reports, this fell to 11.77 million units in 2021, down from the 11.90 million units sold in 2014. Expectedly, employment has contracted, most of which are in the informal or unorganized sector. Lack of demand is the real problem with low capacity utilisation. Indeed, the proposed public investment will create demand for capital and intermediate goods. But if a major part of such investment gets “leaked” in the form of imports, then industrial production may not get the desired boost.

It is necessary to appreciate that India has become an import-dependent economy, especially on China. Despite Atmanirbhar Bharat’s clarion call, India’s imports have increased. Research reports show that India’s trade deficit with China has increased from $57.4 billion in 2018 to $64.5 billion in 2021. This figure would be much higher than China’s official trade account. And the deficit will be even greater if exports to India from China and Hong Kong are combined.

Premature on PLI Scheme

India introduced a Production Linked Incentive Scheme (PLI) for a number of technology-intensive products starting with mobile phone assembly a few years ago to increase production and reduce imports. The budget mentions the overwhelming response to the scheme. However, the evidence for the number of projects that have been commissioned, their investment and job creation, and the increase in domestic content in such industrial units is scant. Therefore, it is too early to claim the success of the PLI scheme.

India launched the “Make in India” initiative in 2014-15 to increase the share of manufacturing sector in GDP to 25% and create 100 million new jobs in the industry by 2022. However, the government identified the major impediment to increasing manufacturing in India is excessive and passive regulation stifling private initiatives.

The solution, it was argued, was to improve India’s rank in the World Bank’s Ease of Doing Business (EDB) index. India did a great job improving its rank – from 142 in 2014 to 63 in 2019-20. But the improved rankings are failing the industrial sector miserably, as noted above, with a steady slowdown. Last year, the World Bank canceled the index because it was globally flawed and reportedly politically motivated (https://bit.ly/3HlaWSm).

Nevertheless, the current budget emphasizes on improving the EDB index and reducing regulatory constraints on industry and infrastructure to boost growth. This appears shocking as the government refuses to learn from past mistakes.

Overall, the Budget for 2022-23 is a bold attempt at public investment-led growth – the same as last year. The widely discussed concerns of unemployment crisis, declining share of private consumption in GDP and rising economic inequality (due to pandemic and lockdown) are barely mentioned in the budget. Instead, the budget places its hope on investment to promote employment in the form of a derived demand for labour. Without funds fully committed to capital investment, the success of the ambitious effort remains questionable.

R Nagaraj is with the Center for Development Studies, Thiruvananthapuram