In her speech, Finance Minister Nirmala Sitharaman said that the next 25 years—the “amrit kal” of India as a country–requires an emphasis on economic growth as well as micro-level emphasis on welfare. In saying this, she summed up the key political economy problem: how does one ensure that growth is not destabilizing or that the political consensus for growth does not break down.
The question is complicated due to the fact that India is also coping with a pandemic and its effects have hit the “base” very hard. In the last two years, this has necessitated heavy expenditures on food and healthcare. From 2022-23, gears will shift rapidly towards growth. The huge jump in capital expenditure—35.4% over the present year—to ₹ 7.50 lakh crore in 2022-23 (from ₹ 5.54 lakh crore this year) is a clear indicator of this strategy.
In her speech, Sitharaman said that, “relying on a virtuous cycle starting from private investment with public capital investment helping to crowd-in private investment,” was an important goal for furthering growth.
The obverse of this bold strategy is the risk associated with it. While financial markets rightly fixate over fiscal deficit figures, the question remains where will resources for higher capital expenditure and the plethora of schemes and subsidies (required for keeping order at the “base”) come from? One source is the decent increase in taxes budgeted by the government for 2022-23. At nearly 10% (net to the Centre), this is a realistic figure given the robust growth in GST in the last one year. The government not releasing an inflated target for non-tax revenue adds to its credibility. The other source is market borrowings. Between the Revised Estimates of 2021-22 and the budget estimates for 2022-23, there is a 32% increase in market borrowings. As long as this money is used to fuel growth by capital expenditure, that will be money well spent.
But the obverse of this strategy is the rising interest payments burden. Interest payments now account for a very high burden. Between 2021-22 (revised estimates) and 2022-23 (budget estimates), they are expected to rise by 15.58%. Interest payments as a fraction of total receipts now account for 42.67% (2022-23, budget estimates, up from 39.14% in 2021-22, revised estimates). As a percentage of tax revenue, the figure will be nearly 49% in 2022-23. These sums are not for the faint-hearted.
Perhaps, this was the time the government had to seize the moment and push forward. The only options were to continue with business as usual and see India fritter away its potential or for doing something bold. The government’s choice in the Budget has been spelled out clearly.