Future growth zindabad!

Finance Minister Nirmala Sitharaman declared that this year’s budget paves the way for an ‘Amrit Kaal’ over the next 25 years, culminating in a prosperous India when we hit 100 years of independence. The biggest spends in the budget were therefore toward future growth in the form of capital expenditure—on big, fixed assets like infrastructure. 

The big spend: The government will spend Rs 7.5 trillion the coming year on capex—which is 24.4% more than the amount spent in 2021/22. It is also 2.2 times of the amount spent in 2019/20 before the pandemic—and will be 4.1% of GDP.

The big beneficiaries: 

• Three areas will monopolise 64.7% of the overall spend: railways (Rs 1.37 trillion or 137,100 crore), roads and highways (Rs 1.87 trillion or 187,744 crore), and defence (Rs 1.60 trillion or 160,419.60 crore). 
• Also on the cards: extending national highways by another 25,000 km, inter-linking five rivers, auctioning 5G spectrum and manufacturing 400 new generation Vande Bharat trains.
• Plus: 100 PM Gati Shakti cargo terminals for multimodal logistics facilities in the next three years.
• States will be offered Rs 1 trillion in 50-year, interest-free loans to spend on similar projects.
• The government has allocated Rs 600 billion (60,000 crore) to bring running water to 38 million more households in FY23. And there is another Rs 480 billion (48,000 crore) to build eight million homes.

Also big winners: Corporate giants like Airtel, Reliance Jio and Adani Group. The reason: The government has labeled data centres as “infrastructure”—which makes anyone building them eligible for cheap and longer-term loans. FYI: Digital infrastructure is poised to become staggeringly lucrative as the government pushes for data storage within the borders, online payments, e-commerce and quantum computing, and 5G.

Another big thumbs up: Clean energy also received a tremendous boost—with significant allocations towards renewable energy, energy efficiency, electric mobility, and green bonds (details here). This too will be good news for Mukesh-bhai given Reliance’s ambitious plans in this area.

The big tradeoff: The government’s argument for its strategy is that spending big on infrastructure will create jobs, encourage private investment that will also create jobs—and therefore boost incomes and inevitably demand.

But many experts question this long-term approach at a time when so many Indians are suffering due to two years of the pandemic—which has led to a disastrous combination of rising unemployment and inflation. People have less money to spend and everything is much more expensive (we explained the inflation figures yesterday). 

Point to note: Unlike the US and other Western countries, the Indian government did not give direct financial assistance to its citizens during the pandemic. As a result, we’ve witnessed a ‘K-shaped’ recovery—where some parts of the economy have bounced back while many others remain in a pandemic slump. In contrast, the US has managed a V-shaped recovery and is back on the path of pre-pandemic growth. The reason: putting money directly into people’s pockets offers an instant boost to private final consumption expenditure (PFCE)—the money that individuals spend—which accounts for 56% of our GDP.

Quote to note: The government appears to believe that the pandemic is mostly over—and has also cut back on the limited assistance offered in recent budgets. As one government source put it: “We didn’t do it then… now it makes little sense.”

Sorry, we don’t feel your pain…

Not an election budget: Defying the predictions of experts, the budget did not contain any measure targeting key vote banks. Nor was there populist namechecking—to housing, electricity, cooking gas, toilets numbers or even specific states. There wasn’t much for Modi loyalists among the middle class either. No new income tax deductions or sops were doled out. But the government did hike customs duties on several products—from umbrellas to headphones.

It’s always refreshing when governments don’t use budgets to advance their electoral ambitions. But in this case, a number of experts critique what they see as flagrant callousness. The government has ignored the level of economic distress—especially in rural India. 

Zero employment relief: The government has allocated Rs 730 billion (73,000 crore) for the rural job scheme MGNREGA—which is the same as last year. But it actually represents a substantial cut. The reason: The government upped spending during this fiscal year to Rs 980 billion (98,000 crore)–-since so many returning migrants turned to MGNREGA to survive the pandemic. And the actual money available to spend is even lower for 2022/23:

“[T]he central government was yet to clear pending wages of Rs 14.64 billion (1,464 crore) and pending material costs of Rs 109 billion (10,900 crore), the arrears totalling Rs 123.6 billion (12,364 [crore]). ‘This is going to eat up part of next year’s budget. So, effectively only about Rs 607 billion (60,700 crore) is available for next year.’”

And this is at a time when demand for jobs under the scheme continues to rise—40% higher between April 2021 to January 2022 than during the same period in 2019-20. As of December 2021, around 9.1 million (91 lakh) households that demanded work had not received it. 

Zero relief for farmers: Farmers’ income from crop cultivation had already declined in real terms in 2019 compared with 2013—and the situation has worsened in the past year due to rising energy and fertiliser prices. And yet this budget has drastically reduced the fertiliser subsidies from Rs 1.4 trillion (140,000 crore) last year to 1.05 trillion (105,000 crore)—and the actual buying power of this money is even lower due to higher global prices. And Mint predicts that current caps on electricity and diesel prices will likely be removed once elections to crucial states are over. This is “a sure recipe for reducing real farm incomes at a time when the rural economy is already under severe distress.”

Data point to note: Taken together, the government has slashed subsidies for food, fertiliser and fuel by 26.6%. One bright spot: The allocation for education has jumped by 11.86%.

But hey: Farmers can look forward to Kisan Drones that will help them assess their crops, digitize land records and spray insecticides and nutrients.

The bigger picture: There are two key problems with the government’s approach that does little to boost personal income in the short run: 

• One, it does not immediately create jobs at a time when young people are rioting in the streets due to unemployment (see: Bihar). Only 34.6% of our working-age population was employed as of June 2021. 
• Two, rural demand is a huge component of our economy’s health. In fact, lower-middle income households account for 66% of all consumption. And there has been a sharp slowdown in rural consumption in the past 6-9 months.

A final note about those taxes…

Not many Indians will be making much more money, but the government has no such problem. It estimates that tax collections will continue to soar—and it will earn a total gross tax revenue of Rs 27.58 trillion (27,58,000 crore).

A new source of taxes: All things crypto. The government plans to slap a 30% tax on all gains made from cryptocurrency—which will be treated as “digital assets.” So you will pay taxes just as you do when you sell shares—except there’s a catch: Unlike stock sales, you will not be able claim losses as a tax deduction. And you will pay an extra 1% tax deducted at source so the government can track each transaction. The move will clearly dampen the enthusiasm of crypto investors—which may be its aim. 

But hey: The government plans to introduce its very own digital currency. Think of it as a “soft copy” of a paper note. The big difference between doing a normal bank transfer and a digital currency transfer is that it will be much faster due to blockchain technology. Also: A digital currency is as secure as that paper note in your pocket—i.e. you are in no danger of losing your digital paisa because your bank went broke.

Reading list

• Indian Express offers an insightful analysis of the decision to choose capital expenditure over boosting incomes and consumption. 
• Also in Indian Express: a report based on insider sources on why the government didn’t go for populist measures.
• The Wire offers a big picture (somewhat nerdy) critique of the budget. 
• Mint has a very good analysis on how it fails to address rural distress—and why it is disastrous for private consumption. 
• Quartz looks at the big boost for green energy.
• If you’re interested in the crypto tax angle, Indian Express has an explainer while Economic Times reports on reactions from crypto investors and companies.
• This Twitter thread has the best explanation of a digital currency, while this Mint column argues that it is a bad idea.
• You can also read our previous explainer on the Cryptocurrency and Regulation of Official Digital Currency Bill.