After a decade-long lull in the growth of private investment and employment, Budget 2023-24 makes a last-ditch attempt to boost capital expenditure and consumption demand by putting more money in the hands of the middle class via personal income tax concessions. There will be no tax for income up to Rs 7 lakh annually. This may barely ensure the recovery of real incomes of the middle class, which are already eroded by inflation. The government has also increased its capital expenditure budget by 33% to Rs 10 lakh crore. But will all this turn the economy around in a meaningful way? Government capex growth alone is not a panacea, as we have seen in recent years.
In my view, Budget 2023-24 is at best a holding operation, against the backdrop of the world economy facing the prospect of a recession, and the developed world preoccupied with fighting high inflation with unusually tight monetary policy. India is hardly immune from the IMF forecasts of the global growth rate dropping from 3.4% in 2022 to 2.9% in 2023. India’s GDP growth is projected at 6.1% for 2023-24, down from 6.8% the previous fiscal.
If one goes by this framework the Indian budget, Modi’s last before the 2024 general elections, has limited headroom to make any significant progress on growth and employment. The truth is that the nine years of the Modi government have been marked by stagnation in private investment and employment. The government is now openly admitting that private investment has not been forthcoming, in spite of myriad tax and other incentives given since 2019. After the release of the Economic Survey, NITI Aayog vice chairman Suman Berry conceded that government-driven capital expenditure growth has become imperative, with corporates reluctant to invest. However, history tells us that growth and employment cannot fully recover without private investment taking off meaningfully. Public investment alone would not suffice. Essentially, this has been the story of Modinomics in the last nine years. It has been a lost decade for private manufacturing investment.
Consequently, employment too has been stagnant. CMIE data clearly shows that total employment in the economy has been stagnant in the range of 405-410 million every fiscal year since 2019-20. Only the COVID-19 year of 2020-21 saw a big dip to about 386 million and after that, there has been some recovery in total employment, but it remains below the 2019-20 level. This stagnation does not bode well for the economy. The Modi government has tried to give huge supply side incentives to corporates to boost manufacturing and employment, but the private sector has not invested because it felt that demand was not growing across the board. For instance, the volume of two-wheeler sales is more or less the same as it was five to six years ago. If people’s incomes at the bottom of the pyramid is stagnant, how will demand pick up? If demand doesn’t grow, why would the private sector invest? The government has been caught in this Catch-22 situation for many years. Post-COVID-19, incomes of the bottom 70% of the population suffered even more.
Whatever hype budgets may create, the legacy of Modi’s nine years in power has been a stagnation in manufacturing, private investment and employment. In recent times, high inflation has become an additional problem. Government spending on infrastructure, though substantial, has not been even remotely able to counter the near-absence of private investment growth. Governments can only do so much, given the resource constraints in a low middle income country.
Consequently, India faces this great paradox where the government boasts it is the fastest growing economy, and yet it is compelled to provide free rations to over 81 crore people! Additionally, the government is having to keep reasonably high budget allocations for legislated employment guarantee programmes, which the prime minister had described as a symbol of the failure of the Congress’s economic policies. This contradiction is structural and needs to be studied closely, instead of resorting to unceasing hyperbole about India having arrived as the fastest growing economy. There is a lot of work to be done.
It is convenient to enter ‘Amrit Kaal’, invoked frequently in the Budget speech, in the 10th year of this government. All promises are now put off for the next 25 years, as the president’s address to the joint parliament session suggested. The previous nine years’ record of private investment and employment may not be even a footnote in ‘Amrit Kaal’.
This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been republished here. To subscribe to The India Cable, click here.