Union Budget 2022: Provides Encouraging Signals for India’s Economic Future

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A substantial increase is expected in public investment – ​​if spent efficiently and quickly, it can give the economy a boost. But there are concerns about inadequate support for those at the very bottom of the economic ladder.

The central government of India is relatively small, even taking into account the level of income and development of the country. This feature is particularly apparent on the revenue side, and taxes generate much less revenue than expenditure – presenting the budget deficit as a percentage of GDP tends to mask this imbalance. This means that every rupee spent by the government should count. Of course, historically, the government has played an outsized role in the Indian economy, through discretionary policies and numerous controls. Thus, the budget was an opportunity for the government to micromanage the economy, with many adjustments and signals of intent. Fortunately, especially in recent years, that approach has begun to fade, and this year’s budget seems to follow that trend.

The central government budget can be thought to influence macroeconomic stability, economic growth and distribution. This year marks the beginning of a return to a more normal situation, as the pandemic finally recedes. The new budget appears to be doing a reasonable job of setting the budget deficit target, with some consolidation. Despite still fairly high inflation, macroeconomic stability does not seem to be in danger. Buoyant tax revenues, reflecting both a recovery from pandemic-induced disruptions and the benefits of the new GST structure, mean the deficit target is realistic rather than ambitious. Less rosy, however, is the increased share of spending that has to be spent on interest payments, due to pandemic-related spending. That leaves less, of course, for productive spending.

The main feature of the budget has been the planned substantial increase in public capital expenditure, particularly for infrastructure. It’s welcome. As long as spending is done efficiently and quickly (not an easy combination), it can give the economy a boost and put it on a higher growth trajectory. Depending on the various spillovers and multipliers, this increase could stimulate private investment and job creation (at least in some sectors). Continued efforts to boost manufacturing growth and an overhaul of special export zones also promise to complement increased infrastructure spending.

Of course, there is a trade-off, and there are concerns about inadequate support for those at the very bottom of the economic ladder. Evidence suggests that spending on job guarantee schemes, nutrition, health and education may still be insufficient, as those at the bottom of the scale are far from having fully recovered from the pandemic. Thus, of the three government objectives on which the budget influences, distribution is perhaps the least well addressed. It is true that this government has paid more attention than its predecessors to providing basic services like affordable housing and running water, but that will not make an immediate difference, so temporary income supports would have perhaps received more weight this year.

After the Farm Bills debacle, there is not much attention paid to agricultural reform, including rethinking the foodgrain supply system, but perhaps it is best to stick to a collaborative approach involving states, which would have been the right approach for the failed agricultural marketing reforms anyway. It should be noted, however, that policy reforms to save water in agriculture are vital, not only to avert environmental catastrophe, but also to make drinking water available for cities. Water pipes will be useless without a regular supply. This problem has hampered attempts to improve sanitation, including the construction of toilets. India has one of the lowest per capita water supplies in the world, so using water more wisely is extremely important.

The budget didn’t tinker too much with the tax system, continuing a move toward simplicity and predictability. Trends towards trade protectionism also appear to have been halted. Particular attention is paid to the digital economy, including infrastructure and incentives for start-ups, as well as the start of the long term towards a greener economy. This last goal will require much more attention and investment, and it will have to happen sooner rather than later, but the initial rhetoric and policies are pointing in the right direction. However, some environmental experts have pointed out that ecological sustainability could be undermined in the focus on reducing greenhouse gas emissions. In fact, neglecting ecosystems can increase the costs of reducing emissions.

Other headlines focused on new taxes on digital assets and the introduction of a digital rupee. Many other details have been commented on and will continue to be analyzed, even as the budget itself slowly translates into actual plans and expenditures. A major concern has been whether the balance between consumption and investment is the right one, with weak demand for much of India’s population. A skewed demand pattern is also undesirable, along with gaps in capacity restoration for the bottom half of the population. One issue that does not seem to have received systematic attention is the need to increase household savings and improve financial intermediation. There is therefore room for further improvement in policy direction and design. But the budget provides many hopeful signals for India’s economic future.

The author is a professor of economics at the University of California at Santa Cruz.

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