[Prakash, Amit Sharma & Samit Sharma]
Financial Year 2023 is the first ever budget associated with a 25 years’ perspective plan to move the Indian economy from its current Rs 232 lakh crore (approximately $3 trillion) to its expected size of $5 trillion economy in the medium term.
However, the method of projection used in the budget is based on the assumption that the short-run trend will be replicated in the current fiscal year.
The success of any strategy lies in its capability of altering the current situation that nullifies the past trends by initiating a new process in operation. It would have been appropriate if prediction or forecasting method had been used since pandemic condition of 2020-21 is likely to end earliest by the end of the first quarter of the fiscal.
Besides, the budget statements confuse the rate of recovery with the mixture of the rate of recovery and the rate of change. It is heartening that the Indian economy has rapidly recovered from the debilitating conditions of the pandemic to achieve 9.2 percent change in GDP. This rate comprises 8.9 percent of the recovery rate, while the rate of growth is only 1.3 percent on the 2019 base.
An important property of statistics is that the deeper the slump the smaller is the base; the greater is the rate of growth for any given absolute change used in the numerator. The expected rate of growth of 8.2 percent in the current fiscal is also based on the above and the measures outlined in the budget.
The financial health, growth and welfare are basically associated with macro fundamentals, which basically include investment, employment, output, income and inflation. The heartening point is that INR 10.9 lakh crore investments are expected to materialise. Another INR 2.5 lakh can be expected to come from states/public sector and other entities, so INR 12.5 lakh crores will address the problems of unemployment, welfare and growth. But the projected figure of 8.2 percent of GDP Growth is an overestimate because:
- Considering a 5:1 capital-output ratio, the expected investment will generate only INR 2.5 lakh crores of additional output. (Source: www.thehindubusinessline.com)
- On the basis of marginal propensities of investment and consumption INR 0.5 lakh crores of additional investment may materialise from the above additional income while INR 2 lakh crore consumption is expected to generate INR 5.2 lakh crore additional incomes.
(Source: A simple econometric investigation of the real private final consumption expenditure in relation to real GDP at factor cost over the period 1970-71 through 1999-2000 yielded the marginal propensity to consume with respect to current income of about 0.60, implying a multiplier value of 2.5. Thus, a one percent increase in, say, government spending or autonomous private investment would raise income by 2.5 percent. https://www.rbi.org).
Thus, both primary and secondary income generation process will create an additional income INR 8 lakh crore worth of income in the current fiscal. This change will be associated with a rate of growth of 3.4 percent. The budget puts faith in the indirect effect of operationalizing backwards linkages of the projected investment. It’s pertinent to mention that the RBI expects a 2.45 impact, ie, INR 30 lakh crores impact on the INR 12.5 lakhs capex in the current fiscal, ie, 10 percent of GDP as per the finance minister.
However, the multiplier works best when the investment expense is deployed in the manufacturing rather than services and/or agriculture sectors. Further, as evidenced in the study quoted above, the government expenditure tends to have a positive effect on aggregate demand and hence GDP albeit with a lag. It can be a subject of further study whether this happens due to government expenditure crowds out private consumption due to reducing availability of credit in the banking sector for both investment and consumption.
“On divergence in growth estimates in the economic survey and the budget, she said the survey had used advanced estimates of the central statistics office that had not taken into account the impact of the third wave of the pandemic. Sitharaman said the government thought it better to spend taxpayer money on capital expenditure, citing a Reserve Bank of India study that said every rupee so spent brought a return of 2.45 in the first year and 3.14 in the second.” (Source: https://economictimes.indiatimes.com).
- Assuming INR 18,000 minimum wages to be paid to construction labour and 1:1 capital labour ratio the construction of 80 lakh houses for the poor will generate employment for lakhs of people. Budgeted amount for the construction of these houses is INR 48,000 crores and thus using the abovementioned ratio about INR 24,000 crores will be spent on paying wages of labour.
As marginal propensity of consumption of labour is very high, ie, 0.95, thus, of the INR 24,000 crores, approximately INR 22,800 crores will generate demand for food, clothes, transport, low priced consumer durables and health, etc. This will activate the consumption multiplier of growth of abovementioned industries. Besides, 25,000 km roads are also to be constructed employing additional labour for road construction. The activation of backward linkages of construction industry will generate demand for intermediate inputs cement, sand, steel, wood, electrical goods like bulbs, tube, tar, crushed stone, etc, which will facilitate utilisation of access productive capacities of these sectors and regeneration of employment lost due to the pandemic.
Hence, we estimate the output effect of these to be less impactful on output as compared to the budgetary estimates. The effect of the government’s INR 12.5 lakh crore capital expense we calculate as INR 12.5 lakhs approximately in the current year and then have a greater impact with a lag in the next fiscal. Thus, we expect the economy to grow at 5-6 percent rather than 8 percent as per budgetary estimates. (Prof Shri Prakash is a recipient of Kautilya, JK Mehta and Atal Bihari awards for contribution to economics.)
