Budget 2022- The uncommon budget

In the year when 5 states go for election, the government announces a very uncommon budget in India. Unlike the usual practice, the country has moved from pleasing the “common man” to creating and implementing a vision for prolonged growth of the economy for the next 25 years.

Consider the relationship of a mother and a child. For how many years can a mother spoon-feed her child? For how many years can she keep the child dependent on her? Wouldn’t it be better if she educates the child on how to eat, cook, and finally earn money to sustain himself/herself? Similarly, giving freebies, concessions, subsidies, etc. is like spoon-feeding the economy and its population. They solve important issues but are short term solutions. Whereas putting money in capital expenditure, making structural reforms, promoting ease of doing business, etc. is equivalent to making the economy self-sustaining. The very fact that the government is bold enough to prefer giving a pro-growth budget and not a populist one even in an election year speaks volumes about their commitment to boosting growth in the economy.

Now, let’s go to the theory and understand how this budget is pro-growth.

Basics of economics states the GDP equation as

GDP=C+G+I+(X-M)

Where C is consumption, G is government spending, I is private investment, X is Exports & M is imports

When any of the above factors increase, GDP increases. The budget has focused primarily on increasing government spending (G) in order to propel private investment (I) while completely disregarding direct focus on the increase in consumption (C) in the form of subsidies or tax relief. The government has shifted focus to increasing exports (X) and reducing imports (M) by the ‘indirect taxation and duties’ route i.e. increased subsidies on production in India and increased duties on products imported.

In numbers: There has been no increase or decrease in the taxation for individuals or corporates. However, the government has proposed a 35% increase in capital expenditures going to up to Rs. 7.5 trillion in FY23. This when combined with the capital expenditure of the states can go up to Rs 10.7 trillion in FY23.

Why is government capital expenditure even important?

As per theories in economics, when the government spends on capital expenditure then it triggers an increase in private spending which in turn creates jobs and increases consumption. Therefore, the idea is that when the government spends Rs.1 on Capex then the increase in GDP will be more than Rs. 1. This is called the fiscal multiplier or the multiplier effect. As per the article “Fiscal Multipliers in India” by Sukanya Bose published in The Journal of Applied Economic Research, the Capital expenditure multiplier in India could be as high as 2.45. This means that for every rupee spent by the government on Capex, India’s GDP could rise by Rs. 2.45 (given everything else is constant). This concept of a multiplier effect makes Capex expenditure by the government a critical factor for the sustainable GDP growth of a country.

Key points to cheer in the budget

1. India to announce the introduction of our own virtual digital currency (digital rupee) using blockchain technology. This currency will be introduced and regulated by the RBI.
2. India to now recognize all other cryptocurrencies as a separate asset class (and not as a currency) and shall tax the transfer of such assets at 30%. Given that money from the equity market is taxed lower, the differential would mean some capital that went into crypto trading would now flow back to the equity markets.
3. National Highways to increase by 25000 km by next year
4. Starting of 5 new river linking projects across the country
5. Formulation of new battery swapping policy. (No longer need to wait for the battery of your electric vehicle to charge. Simply give your uncharged battery, take a charged battery and leave, saving hours of wait period)
6. Auction of 5G spectrum
7. Focus on cleaner & greener energies such as EV, solar under the PLI scheme.
8. 400 new Vande Bharat trains
9. Rs 2.37 trillion for direct payments under MSP for farmers
10. 68% of defence procurement to be done from domestic companies under Atmanirbhar Bharat
11. Digitization of educational courses for schools and universities
12. LTCG surcharge to be capped at 15%
13. No tax increase for individuals or corporates despite ongoing and prolonged pandemic.

The sectors that would directly benefit from the budget are those focused on clean energy, infrastructure, cement, steel long products, EV infrastructure, MSME, drones, defence equipment & Edu-tech.

The budget has surely provided us with tax stability and fiscal stability along with major reforms to ensure sustainable growth. It steers a path towards India becoming a global manufacturing hub of sunrise sectors while helping the more traditional sectors to prosper. However, given that there is no direct and immediate benefit to end consumers, it would be interesting to watch whether the upcoming elections in states like UP can ensure political stability in India. The biggest question now is will the people truly see the intent of the government for the long term rather than feeling disappointed about not having a rupee more in their pockets right now?