Although the annual budget of any government is only a statement of revenue and expenditure, and that too based on estimates, the document holds immense significance.
India, one of the most closely watched emerging economies, has lately presented its Budget. The political critique by the opposition aside, it is important to find out if the roadmap of the government is progressive and inclusive. In a democracy with multiple political parties, opposition criticising any move of the ruling party is a common sight. But that is not what matters when it comes to making progress with an inclusive approach. For this reason, it is good to steer clear of all the political noise around the budget and read it in view of its medium-to-long term impact on the Indian economy.
But before we know what the budget has for Indians, let us know a little about how the global economy is faring.
Rising inflation and subdued growth
From developed to developing, all economies are reeling from inflation.
The global stock markets were in a steroid mode last year. All major indices including the S&P 500 in the US and Sensex in India were at record high levels in 2021. Come 2022, these indices are trading in red. In the market, the biggest worry today is looming rate hikes by central banks. The Fed in the US has clearly indicated that higher rates are coming in March. Investors know that a hike by the world’s most powerful central bank would trigger similar moves by other central banks including the RBI.
The only reason why the Fed or other central banks are so eager to raise rates is soaring prices of virtually everything, from food to energy. Interest rates were maintained at near-zero levels by the Fed in order to lift the US economy out of the pandemic-induced slowdown. Here in India, the RBI and the government resorted to the Keynesian economic policy by keeping interest rates low and undertaking fiscal measures to inject liquidity. Though most economists would agree that this was only way out, one of the fallouts of loose monetary policies of all central banks is skyrocketing prices. In the US, the UK, Australia, Canada and most other economies, annual inflation is hovering at its highest level in decades.
Why inflation matters and why it must be considered while discussing the budget is because a section of the news media is blaming the government for not injecting near-term liquidity in the economy through measures like tweaking the income tax slabs. Had the government conceded to such calls, inflation would have become a monster. People with money in their hands would have created more demand leading to an unmanageable scene with low income and poor households getting elbowed out.
Spending on infrastructure
In the union budget, the government has hiked capital expenditure by a whopping 36 per cent. The biggest highlight is the Gati Shakti plan that envisages development of roads, railways and other infrastructure in India to speed up movement of people and goods.
The PM Awas Yojana has been allocated nearly INR 48,000 crore. Houses in both rural and urban parts of the country would be indentified to boost one of the basic necessities. From new Vande Bharat trains to bringing more railway tracks under the KAWACH scheme that prevents accidents, the spending has been both targeted and well-intentioned. Here, it is important to understand that any economy can withstand a sudden emergency like the Covid pandemic only when it has the requisite infrastructure. From health to digitalization to basic logistics like ports, the foundation has to be so resilient that any unforeseen crisis does not adversely impact progress.
One of the reasons why the country had to undergo pains during the two years of the pandemic is the lack of resilient infrastructure. Consider this. The global economy is reeling from shortages of semiconductor chips. This shortage has led to soaring prices of electronic goods and even cars. The world now realizes that the semiconductor manufacturing was concentrated too much in one region. The US government has announced incentives for chip manufacturers to ease supply pressures. This is what the world needs. In order to develop into a formidable economy that is both self-reliant and a big exporter, programmes like Gati Shakti are a prerequisite.
Secondly, by hiking the Capex in the budget, the government has made sure that any liquidity is injected into the economy only in a phased manner. Infrastructure projects would take longer time to develop, and these will also be a job creator for low-income and poor households. Had the budget preferred immediate expenditure over infrastructure, inflation would have spiraled out of control.
Money to deserving businesses
The extension of the Emergency Credit Line Guarantee Scheme until next year could be the booster dose that small and medium businesses needed.
Before we discuss this, let us also know that small businesses are under pressure around the globe. In the US and Canada, the federal governments are extending fiscal support to these businesses in the wake of the lockdowns brought by the pandemic. Elsewhere too, the pains of small businesses are a top agenda for governments. This clearly highlights the fact that MSMEs are passing though a subdued phase not only in India but in every economy, developed or developing.
That said, the extension of the ECLGS is laudable. The government would also help commercial banks in setting up digital banks in multiple districts to liberalize access to capital and other banking services. In a separate move, the budget extends the tax concession period to provide the much-needed thrust to newly incorporated entities. In order to emerge as a manufacturing hub and not let China continue as the factory of the world, India always needed policy actions like lower levies on new units. Even before the budget, the production linked incentive (PLI) scheme was in place for textiles, chip manufacturing and cleaner mobility.
Another advantage of having digital banks in 75 districts as announced in the budget is the cutting of red tape. Though the government has yet to come up with the framework for the privatization of large banks, the move to have digital banks will expedite a lot many things. Small businesses often lack opportunities to expand owing to the complexities involved in accessing capital. Digital banks would become enablers.
Sustainable, greener India
The biggest highlight of the budget was the stress of the government on the climate change issue. Though a few experts view greener and renewable energy as the way to tackle greenhouse gas emissions, the economics of greener technologies is even a bigger subject-matter. From the US to China to Russia, every country has pledged to cut emissions in order to limit the rise in temperature. It is evident that the world needs to produce more energy from renewable sources including solar. The budget has a provision for INR 19,500 crore PLI for solar modules manufacturing. Besides, the government will issue sovereign green bonds to shift its borrowing toward resource mobilization for clean energy.
Now consider this. Elon Musk is the world’s richest person and much of his wealth comes from his shares in the electric car manufacturer Tesla. Tesla Inc. is also one of the listed stocks that have outshined almost every blue chip stock in terms of price growth over the past couple of years.
India, in order to lead the world in the 21st century, always needed to focus on newer technologies like the lithium ion battery that can power mobility. Today, China is the world leader in electric car and batteries, but India may be heading toward winning the race in the medium-to-long term. The budget paves the way for battery swapping, a measure that has been hailed by both industry participants and environmentalists. Much of the air pollution in the country owes to fossil fuel engines and by having a clear framework for swapping of batteries, the government can expedite adoption of electric vehicles. Though the progress in this sector has been quite rapid over the past few years, with Ola establishing one of the largest factories for EV production, adoption by the wider public has not been impressive.
The country, similar to the developed economies of the US and Canada, lacks the requisite infrastructure for EV charging. Though the government is working in this regard by identifying and installing charging stations at various places, swapping of batteries is much more feasible for owners. Besides, the move will attract major companies to take a plunge in electric mobility, which can eventually turn India into a world leader in the battery production industry.
The much-debated bits
That the union budget could have done more for the middle-class by hiking the income tax slabs was one of the most criticized elements by the opposition.
First, it is important to understand that by hiking the slabs, the government would not only have sacrificed its revenue that ultimately goes into funding of policy actions like free vaccination drive and MGNREGA, but also would have inadvertently added liquidity to the economy, which would have triggered demand, and hence, price rise. Inflation has been one of the biggest fallouts of the pandemic, not just for India but for all economies. Besides, government spending on public welfare has seen an uptick, thanks to vaccine drives and schemes like free food supply to poor households. Hiking the tax slabs was neither feasible nor an equitable policy approach.
Second, the budget announcement of a 30 percent tax on cryptocurrency assets made to the front pages of almost every newspaper. The world is fascinated by this emerging asset class. Not just Bitcoin, assets like Ether, which are all ultra-volatile in terms of prices, have seen rising participation of retail investors. In India, dedicated crypto exchanges have sprung up over the last few years, and retail investors have joined the crypto frenzy in big numbers, without realizing the underlying risks of such investments. That an asset like Bitcoin, the price of which can change drastically overnight, can make one richer is the dominating theme. But the same asset can also lead to steep losses in a very short time is also a reality. By levying the highest tax on these assets, the budget clearly warns investors against the risks.
Additionally, the budget paves the way for digital rupee that will be issued by the RBI. Digital currency is the way forward but it cannot be left in the hands of private players. The finance minister has stressed that any currency other than the one issued by the RBI is an asset. The RBI’s digital rupee can make access to capital both cheaper and faster, which can lead to another wave of rapid economic growth.
India is an economy where a large section of population has yet to be lifted out of poverty. Besides, the pandemic has led to job losses and rising prices. Over the past two years, the RBI and the government did all they could to inject quick liquidity in the economy to not let it plunge into recession. Now, it is time to pave the road for medium-to-long term economic development, which is impossible without stressing on capital expenditure.
Tax rate slabs are more a political move by any government to appease the middle class. For now, India is in a phase where more than appeasement, the very roots of the economy have to be strengthened. Besides, clearing the air on things like cryptocurrency assets was needed to preserve the interests of the vulnerable amateur retail investor class. Gati Shakti plan is at the heart of not only the 2022 budget, it will also be the driving force behind long-term resilience of the Indian economy.
Lastly, the government’s intent to make India a world leader in clean energy and electric mobility reflects in this budget. These sectors would not only lead to cleaner air and a better life for all Indians, but also to creation of new jobs. ‘Sustainable’ is the underlying theme this time.
By Dr Sunil Gupta
(The author is a Chartered Accountant)