‘Demand recession’ is inevitable if Government does not reform taxation, subsidy administration, unshackle farmers and ruthlessly tackle corruption
The Union Budget for 2022-23 provides for capital expenditure of Rs 750,000 crore which is a jump of over 35 percent from the budget estimate (BE) of Rs 554,000 crore for 2021-22 (revised estimate (RE)for the current year is Rs 604,000 crore which is more or less close to the BE when we exclude Rs 50,000 crore given to Air India Asset Holding Company Limited AIAHCL where the debt of now divested Air India resides).
Considering that the BE for current year was 26 percent higher than the RE of Rs 439,000 crore during 2020-21, this sounds impressive. However, when seen in juxtaposition with over Rs 100,00,000 crore investment needed to build infrastructure over five years-for catapulting the Indian economy to $5 trillion by 2024-25 – (this roadmap was laidby Nirmala Sitharaman in her maiden budget for 2019-20), these numbers are still inadequate.
As per the roadmap, 39 percent each of this amount was to come from the Centre and States and the balance from the private sector. This works out to Centre’s contribution of around Rs 40,00,000 crore over five years or Rs 800,000 crore per annum. For three years (2020-21, 2021-22, 2022-23) put together, this comes to Rs 1700,000 crore (this is subject to all of the Rs 750,000 crore allocation for 2022-23 materializing) which is Rs 700,000 crore short of the proportionate amount required for this period or Rs 2400,000 crore. The capital spend by states too has been far lower than the amount expected of them.
The Modi government expects private sector to partner with it in giving the required boost to economic growth; in fact, of the Rs 100,00,000 crore, Rs 22,00,000 crore was to come from the latter.
To make it happen, the Government had also given a plethora of incentives – the mother of all being steep reduction in corporate tax rate to 15 percent for new enterprises (22 percent for existing enterprises down from 30 percent) given in September 2019. It has also unveiled the much-trumpeted PLI (production linked incentive) scheme.
These allurements have so far failed to yield the desired results. The crucial point is investment by private sector is governed primarily by the fundamentals of demand and supply.
For several years, industries have been operating at low-capacity utilization due to proliferation of capacity on the one hand and demand limitation on the other thereby impacting investment and growth. During 2019-20, GDP growth plummeted to a decade low of 3.7 percent. During 2020-21,it contracted by 6.6 percent, courtesy, Covid. Things are looking up during 2021-22 with the budget estimating growth at 9.2 percent, but surplus capacity remains.
During 2022-23, even as the government is hoping to consolidate with GDP growth estimated at 8 – 8.5 percent, it would be naïve to expect private firms add to fresh capacity as they will be focused mostly on enhanced utilization of the existing capacity. Yet, unmindful of the ground realities and bolstered by a so far untested notion that massive sustained push by public sector investment will result in so called ‘crowding in’ of private investment, it continues to ride on the incentive spree.
In the 2022-23 budget, the eligibility of 15 percent corporate tax has been extended to new entities which get incorporated before March 31, 2024 – against the existing threshold of March 31, 2023. The start-ups get one more year (those set up before March 31, 2023) to avail of tax holiday. The FM has also reduced surcharge on profits of cooperatives from 12 to 7 percent.
These incentives result in loss of revenue but there is no certainty regarding the outcome in terms of investment. Yet, they have a strong destabilizing effect on Centre’s finances.
The RE of fiscal deficit (FD) during 2021-22 is about Rs 15,90,000 crore or 6.9 percent of GDP (against BE: Rs 15,07,000 crore). Slippages in welfare schemes aggravate the stress. On fertilizer subsidy, against BE of Rs 80,000 crore, the RE is Rs 40,000 crore. We cannot also be oblivious of the escalating burden of interest payments – courtesy high FD/borrowings year after year – which takes away nearly 50 percent of Centre’s net tax revenue.
The FM has kept FD for 2022-23 at around Rs 16,60,000 crore which works out to 6.4 percent of GDP. She has described this as ‘advancing on the road to fiscal consolidation’ citing the target of 4.5 percent to be achieved by 2025-26. This is amusing.
A committee on Fiscal Responsibility and Budget Management (FRBM) Act under Dr NK Singh set up by the Modi government (2016) had asked it to aim at FD of 2.5 percent during 2022-23. While, presenting the budget for 2021-22, the finance minister brushed aside this recommendation; instead, she dished out a revised trajectory of FD aiming at 4.5 percent and that too in 2025-26. Having changed the goal post then to argue that we are on track to fiscal consolidation is anomalous.
The vision and the action plan of Team Modi with its overarching focus on building infrastructure; inter-linking rivers; boost to technology driven agriculture with focus on small farmers; nurturing MSMEs and so on is laudable. But there is no clear vision on funding these initiatives in a ‘sustainable’ manner. Four areas need attention.
First, Centre’s gross tax to GDP ratio has been stagnating around 10-11 percent for years (10.8 percent during 2021-22). This is despite unconscionably high tax incidence on petroleum products (about 50 percent of retail price on petrol and diesel). The government’s efforts to curb evasion especially in GST are commendable. However, there is a lot of untapped potential in direct taxation.
Secondly, at present, direct and indirect taxes contribute almost equally to Centre’s tax kitty. This implies disproportionately high burden on millions of those who earn little. If, only the indirect tax share is lowered to say 1/3rd, imagine the extra money it will leave with them and resultant boost to aggregate demand and growth.
Third, the existing subsidy regimes for fertilizers and food are prone to misuse. Curbing leakage of urea (possible only when subsidy is given directly to farmers) alone can save up to Rs 35,000 crore annually. Mammoth sums can be saved by curbing pilferage in administration of food subsidy. The budget has mooted ideas such as ’organic farming corridor’ along the banks of River Ganga, use of drones in agriculture etc. But these can’t provide a substitute for ‘overhaul of the flawed systems’.
Fourth, the government should ensure that the benefits of state support systems viz. subsidized credit, sovereign guaranteeetc actually reach the MSMEs. As for farmers, mere offer of guaranteed purchase of their produce at MSP won’t suffice. The way forward is to give them more choices to sell their produce by freeing up agri-markets.
To conclude, the budget has all the ingredients for building on the good growth seen during 2021-22 and laying the foundation for sustained growth in the medium to long-term. However, the government needs to guard against falling into a ‘debt trap’ and ‘demand recession’ – inevitable if it doesn’t play hard ball by reforming taxation, reforming subsidy administration, unshackling farmers and ruthlessly tackling corruption.
(The writer is a policy analyst. The views expressed are personal.)
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