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India has hailed the Union Budget 2022-23. Most analysts consider it to have maintained a balance between growth and social security. With over 35% increase in capital expenditure and proposed infrastructure spending of more than `10 lakh crore in Budget 2022-23, Nirmala Sitharaman has once again reinforced government’s commitment to using infrastructure as a force multiplier for sustained economic growth.

Unlike the last two years, Nirmala Sitharaman had a better macro-economic platform to chart her growth initiatives. The government has projected GDP growth at 8% to 8.5% in 2022-23 compared with an estimated 9.2% for the current fiscal year and a 6.6% contraction in the previous year.

Reflecting the buoyancy in the economy, the gross tax collections in the revised estimates for 2021-22 have surpassed the budget estimates by more than 13%. Cumulative exports during April 2021-January 2022 have increased by about 35% to 287.84 billion from $209.19 billion in the same period last fiscal. And if FM has not said explicitly in her Budget speech, there is also a big bet on the net export route to boost GDP in this year’s Budget. A number of customs duty recalibrations to give a boost to domestic manufacturing are clear efforts towards achieving this.

What was more encouraging was that the unemployment rate has fallen sharply to 6.57% in January, 2022 according to the Centre for Monitoring Indian Economy. This was the lowest unemployment rate the country recorded since March 2021. In December 2021, the unemployment rate rose to a four-month high of 7.91% compared to 6.97% in November 2021. 

FM relies on higher capex to boost growth

“The overall, sharp rebound and recovery of the economy is reflective of our country’s strong resilience. India’s economic growth in the current year is estimated to be 9.2%, highest among all large economies,” the finance minister stated, as she began her budget speech.

Nirmala Sitharaman has proposed to increase the size of the economy’s annual spending to ₹39.5 trillion ($529 billion) to support her growth plans for the year beginning April 2022. The increased spending will leave the government with a fiscal deficit of 6.4% of GDP while the current financial year will end up with a deficit of 6.9% of GDP against a budgeted target of 6.8%.

And to maintain this growth momentum, she has relied on higher capital spending. The strategy is simple: spend more on asset creation in the core sector and the growth will follow. A massive outlay of funds for the infrastructure projects will automatically create higher activities in a large number of core sector industries such as steel, cement and power which in turn, will generate more jobs and increase consumer demand – the two shots the economy needs right now. 

Considering this imperative, the outlay for capital expenditure in the Budget has been increased sharply by 35.4% from `5.54 lakh crore in the current year to `7.50 lakh crore in 2022-23. This was more than 2.2 times the expenditure of 2019-20. The capital outlay in 2022-23 will be 2.9% of GDP.

“With this investment taken together with the provision made for creation of capital assets through Grants-in-Aid to States, the ‘Effective Capital Expenditure’ of the central government is estimated at ``10.68 lakh crore in 2022-23, which will be about 4.1% per cent of GDP,” the FM claimed in her speech.

For financing the infrastructure needs, the stepping-up of public investment will need to be complemented by private capital at a significant scale. Measures will be taken to enhance financial viability of projects including PPP, with technical and knowledge assistance from multi-lateral agencies. Enhancing financial viability shall also be obtained by adopting global best practices, innovative ways of financing, and balanced risk allocation, the FM has promised.

In terms of investments, roads and railways have seen a significant increase in outlays, with year-on-year increase of over 50%. As part of rail connectivity, 100 PM Gati Shakti Cargo terminals are proposed to be developed over the next three years. Similarly, the National Highways network is proposed to be expanded by 25,000 km during the year, which is nearly double that of the maximum achieved in any of the last five years. The proposed expenditure on urban infrastructure, housing and ports has been maintained at 2021-22 levels, with the outlay on Jal Jeevan Mission increasing by 20%.

This huge increase in capital spending in the last two budgets clearly suggests that the government is considering the infrastructure sector to act as growth multiplier in the coming years. The question is how soon will this expanded public spending lead to an increase in private sector investments too? Another question is: does India have enough ready to implement infrastructure projects if the government continues with this policy for the coming years as well? Even today, a question arises on whether Indian Railways, for example, has enough projects to absorb the `1.37 lakh crore earmarked in the budget, up from `30,000 crore in 2020-21?

Another issue relating to long gestation period big infrastructure projects must bother the policymakers. Understandably, these projects would create jobs and raise consumer demand while under construction but for sustainable growth, the country has to wait for their implementation. According to a report by the Ministry of Statistics and Programme Implementation last September, of the 1,670 such projects, worth `150 crore above 438 reported cost overruns and 563 were delayed. "Total original cost of implementation of the 1,670 projects was `21,66,048.11 crore and their anticipated completion cost is likely to be`25,96,907.70 crore, which reflects overall cost overruns of `4,30,859.59 crore (19.89 per cent of original cost)," the report has observed. The average time overrun in these 563 delayed projects is 47 months. These figures suggest that raising allocation for infrastructure projects in itself will not act as a growth multiplier.

Social sector takes a back seat

While India relied heavily during the peak of the pandemic on its welfare architecture, trends on the release of funds by the government during the current year already gave an indication that keeping the fiscal deficit in check against a sharp rise in capital expenditure, would come at the expense of the social sector. To start with, the health sector — and the social sector as a whole — are set to lose in terms of budget allocations even after the pandemic hardships.

The government has set ambitious targets for the education and health sector but the allocations by the finance minister for 2022-23 in the Budget do not come close to the targets. The new education policy released two years ago had envisaged an allocation of six per cent of gross domestic product to education (combining both the Centre and states’ spending) but the budget allocation is nowhere near it.

The National Education Policy (NEP) 2020 was launched last year with a huge fanfare. It advocated that 6% of GDP should be allocated to the education sector. But this year’s budget comes down to less than 2%. The education budget may have crossed a landmark of 1 lakh crore but it has been decreasing as a percentage of total expenditure.

In terms of significant announcements focusing on school education, the budget talked about expanding the One Class One TV channel initiative under the PM e-Vidya scheme and increasing it to 200 channels from the existing 20. However, despite the push in the digital education field, allocation under the digital India e-learning programme, which includes the PM e-Vidya scheme, has been reduced to `421.01 crore in 2022-23 from `645.61 crore in 2021-22.

The story is the same for the health sector too. The recently published National Health Survey 2019-21 has revealed that the long-term effect of the pandemic might worsen the already failing health indicators in the country further. The survey suggested a strong budgetary commitment by the government to address these concerns.

And what has the FM actually done? She has increased the allocation on health by less than one per cent in the 2022-23 Budget compared to the revised estimates of 2021-22. Admitted, the health budget has seen a 16% rise in 2022-23 over the budgetary estimates of 2021-22. However, as a percentage of GDP, the budgetary allocation has remained stagnant at 0.35%; this might make it difficult to cater to the enhanced resource requirements of the sector at this juncture. A stagnant trend will also make it hard to reach the standard set by the National Health Policy of total public health expenditure being 2.5% of the GDP by 2025.

Therefore, it comes as no surprise that the allocations for mid-day meals are 11% lower than the budget estimates for the previous year. Similarly, even for Saksham Anganwadi and POSHAN 2.0, allocations remain lower than the sum of its components even for the budget estimates of financial year 2020-21.

But there were some surprises. The Mahatma Gandhi National Rural Employment Guarantee Programme (MGNREGA) has been an important social safety net for many during the pandemic. Demand for work remains higher than pre-pandemic levels, though unmet demand (or the difference between employment provided versus demanded) remains high. As per latest data as on February 1, 2022, as many as 7.7 million households that had demanded work have still not received it. Taking cognisance of this increased demand, the supplementary budget announced this year has allocated an additional `25,000 crore to the scheme.

Despite this, the government has reduced the allocation to the MGNREGA programme to `73,000 crore for 2022–23 — a sharp cut of 34% from the revised estimate of `98,000 crore last year. In actual terms, the kitty will be even lower after adjusting for pending liabilities of about `18,350 crore from previous years. Therefore, only about `54,650 crore will be available for 2022-23. If one considers all the 9.94 crore households holding active job cards, then, given the current budgetary estimate, the government will be able to provide only 16 days work per person.

Similarly, the lack of funds allocated for food subsidy also doesn’t bode well for the Food Corporation of India (FCI). With the extension of the Pradhan Mantri Garib Kalyan Yojana (PMGKAY) into its fifth phase, estimated food grain allocations for the financial year 2021-22 are at a record high of 981 lakh tonnes, 79% higher than FY20. However, this year’s budget saw a 28% decrease over the revised estimates of the previous year. Consequently, the debt burden of the FCI is likely to increase.

Nirmala Sitharaman has prioritised long-term growth over short-term growth; raised capital expenditure sharply at the cost of the social sector. FM has talked of “Amrit Kaal, the 25-year-long leadup to India@100” and stated, “By achieving certain goals during the Amrit Kaal, our government aims to attain the vision.”  

The short-term growth narratives are missing. The Budget has probably taken a more conservative view of short-term growth than even the Economic Survey 2021-22. But even her conservative short-term growth projections seem to be under threat following rising inflation – a word she has not uttered even once in her Budget speech.

India's wholesale price index stayed in the double digits in January, for the 10th month in a row, as firms grappled with rising input costs and passed on higher prices to consumers. Wholesale prices in January 2022 rose 12.96% from a year earlier. Rising input costs for products such as fuel, metals and chemicals have pushed up wholesale prices, a proxy for producer prices

India's headline inflation rate based on the Consumer Price Index (CPI) jumped to 6.0% in January 2022 – the highest in seven months. This is much higher than what RBI expects. The central bank’s latest monetary policy last February projected retail inflation to average 4.5% in 2022-23 with Q1:2022-23 at 4.9% and Q2 at 5%. With international crude oil prices touching new records, it may be difficult to rein in inflation.

And if rising prices would affect the budgets of common men, it would likewise upset the government’s investment graph as well. The inflation would increase the prices of goods, raw materials, and factor services and the government would need to spend more than what was projected, to complete investment projects taken up. At the other end, any hike in interest rate to control inflation, as was the case in the past, would increase the capital cost of the investment projects also. FM’s long-term growth vision in the Budget seems to have ignored such small short-term nuisances.