Listen to this article:
One of India’s former finance secretaries has said that the Union finance minister’s claim in her recent Budget speech that she has increased capex by Rs 2 lakh crore is simply not the case.
In fact, he argues, capex has marginally shrunk compared to last year by around Rs 10-15,000 crore. Subhash Chandra Garg also, equally forcefully, says that the goal of becoming a $5 trillion economy by 2024-25 is beyond India’s reach. He says at best India can reach this target in 2026-27.
In a 32-minute interview to Karan Thapar for The Wire, to launch his forthcoming book The $10 Trillion Dream: The State of the Indian Economy and the Policy Reforms Agenda, Garg first spoke about the goal of a $5 trillion economy. His book points out it was first announced by the Prime Minister in June 2019, at a NDC (Niti Aayog) meeting, and then repeated in July 2019 in Nirmala Sitharaman’s first budget. At the time Garg was finance secretary.
Garg said the original announcement was vague because it set the target date as simply 2024. It was then fine-tuned in the budget to financial year 2024-25. This required growth of 11-12% in dollar terms which, Garg says, “was ambitious but achievable”.
In the three years since then growth in dollar terms has been only 4% and in real terms between 1.7 and 1.8%. Therefore to achieve the $5 trillion target by 2024-25 India requires 17% growth in dollar terms each year. This, he says, is “almost impossible”.
Garg said that by his estimation India is at the moment a $3.09 trillion economy. Therefore, it can only become a $5 trillion economy, an increase of 67%, in 2026-27, provided the economy grows at 13% per year in nominal dollar terms and there’s no significant change in the rupee exchange rate.
The other big point made by Garg is that he forcefully believes that the claim made by the finance minister in her recent budget of increasing capex by Rs 2 lakh crore is simply not the case. In a nutshell, he points out that whilst claiming to have increased the Union government’s capex by Rs 2 lakh crore the budget details show that the capital expenditure by Union government owned-PSUs and agencies (like NHAI and the Railways, etc.) has shrunk by Rs 1,20,000 crore. Therefore, in the first instance, the aggregate capex increase is only Rs 80,000 crore and not Rs 2 lakh crore.
However, Garg says that if you now take into account the commitment to offer Rs 1 lakh crore loans for capex to state governments – which they may or may not accept and if they do that could have serious implications for their fiscal independence, all of which is discussed in the interview – then this will be state government capex and not Union government capex. This also means that this year Union government capex is in fact Rs 10-15,000 crore less than last year.
Therefore, his conclusion is that instead of the alleged Rs 2 lakh crore increase in capex, it has, in fact, gone down marginally compared to last year by Rs 10-15,000 crore.
Also with regard to the offer of 1 lakh crore as interest free 50-year loans to the states, Garg views this as a political ploy by the Union government to curb the fiscal independence and, therefore, fiscal sovereignty of state governments and instead assert a measure of its own financial control over them. This is because under Article 293 if a state accepts a loan from the Union government it cannot seek further loans without the Union government’s consent. In this case, since the loans are of a 50-year duration, it means states that accept these loans would have their fiscal independence curbed for half a century. Also under Article 293 these loans cannot be paid back early.
In the interview, Garg points out that the truth about the increase in capex will also affect the finance minister’s claim that her alleged increase in capex will crowd-in additional private investment and, furthermore, it also affects her claim that the budget will create up to 60 lakhs jobs in the next five years. Garg makes it clear he is very doubtful of both these claims.
Watch the full interview here.