Y=C+I+G+NX
Students of economics are familiar with the above national income identity. Conventional economic wisdom suggests that during times of economic downturn, the variable “C” that is ‘private consumption’ should be given a direct stimulus to get the economy back on a growth path. This is generally done by putting more money in hands of the citizens and encouraging private consumption spending.
But, budget 2022 in continuation with the rationale of previous year’s budget 2021, provides a rather indirect economic stimulus via the unconventional counter-cyclical fiscal policy, wherein the concentration of the Indian dispensation has been on the variables “I”& “G” that is ‘private investment’ and ‘government expenditure’. Budget 2022 continues to focus on strong capital formation in the economy and puts in place the incentive structure to stimulate private investment in the production sector of the economy. The rationale may be to create a strong multiplier-accelerator effect and put India’s economy on a growth trajectory.
India’s Finance Ministry has given credence to the idea of increasing government spending through the massive INR 20,000 crore Gati Shakti project which envisages developing the critical connectivity infrastructure in the country. Such infrastructure projects do have the highest multiplier effect if implemented in an efficient manner. Budget 2022 promises an intent to strengthen India’s social infrastructure by announcing an increase in budget outlay towards the National Health Mission, by over 8 per cent in comparison to budget 2021, and about 28 per cent increase in the outlay for National Education Mission vis-à-vis budget 2021. To magnify the benefits of ICT towards ensuring a better-skilled workforce, Finance Minister announced India’s first Digital University, virtual labs and skilling e-labs for ensuring access to education for all in the challenging COVID times. The stimulus for private investment in the budget continues with the announcement of extending the credit lines by INR 50,000 crore to a total cover of INR 5 lakh crore for the two worst-hit sectors during the pandemic- the hospitality and the travel sector.
Recognising start-ups as the key drivers of growth, budget 2022 provides an impetus to entrepreneurial ventures by securing an enabling start-up ecosystem, with an announcement of the extension of the tax exemption to start-ups by another financial year; in addition to previously announced of three years tax exemption. To ensure an upbeat animal spirit, budget 2022 announced an increase in the outlay for Aatmanirbhar Bharat Yojana by about 28 per cent vis-à-vis budget 2021.
As India reels out of the coronavirus pandemic, budget 2022 continues to adopt a nimble approach to support India’s economic recovery. During the global unprecedented times, economies witnessed an adverse demand shock and breakdown of the supply chains. Supply-side bottlenecks weaken the fundamentals of any economy, which may give rise to inflationary tendencies. Before the pandemic India was facing a slowdown, during the pandemic demand further plummeted. But as lockdowns began to ease, demand in the Indian economy bounced back, a significant part of this demand was pent-up demand. But as employment levels have bounced back the demand recovery could be real. India’s growth trajectory has always been discussed to be driven on the back of strong domestic demand that is “C” in our national income identity. Ensuring strong supply-side fundamentals which the current budget focuses on will confirm a strong multiplier-accelerator effect allowing India to unleash the US$5 trillion economy dream. Investment in business activity and impetus to the animal spirit in the economy could also help create jobs for India’s massive workforce.
Budget 2022 appears to be an abridgement of the measures taken by the Government of India to combat COVID induced slump and not a populist stimulus budget that usually one expects before the election cycle. Generally, populist pre-election budgets tend to be inflationary in nature. All-in-all, budget 2022 is prudent, promising a sustained growth strategy. It intends to provide an economic stimulus while ensuring strong fiscal prudence. It envisions building India’s productive capacity and easing the supply bottlenecks. The success of India’s growth story will be conditioned on how well the intent of the budget is executed, and how efficiently and effectively each rupee of the India treasury is spent and accounted for.
The article is written by Prof. (Dr.) Chavi Asrani, Assistant Professor, Jindal School of Banking & Finance, O.P. Jindal Global University
