When any budget has to be analysed from an economic perspective certain questions need to be posed which will give an idea on whether the proposals deliver on expectations. These questions relate to various macro-economic variables which the budget should ideally seek to address.
First, does the Budget lead to higher consumption? The answer is not really because the proposals are focused on the expenditure side and have not really brought about any change in the tax structure to support of thwart consumption. Hence as individual taxpayers, there is not much comfort here. There have been no tax cuts for individuals and benefits if any relate more to housing where there has been extension of the tax benefit schemes. Also, the expectation of higher setoffs on health insurance has not found mention in the budget.
Second, does it lead to higher investment? Yes, the government has increased its capex by Rs 1.15 lakh crore which will directly add to investment. A large part of this will go to roads and railways which are the two favourite sectors when it comes to government investment. There is also an allocation for setting up a DFI with a capital of Rs 20,000 crore. This has the potential to drive the accelerator as it will lead to multiple times the investment as it is used for lending in future. But at the same time this impact should not be overstated as the capex ratio to GDP is just around 2.5% and cannot drive the entire investment cycle.
Third, is the issue of jobs. This has been one nagging factor in our growth story for the last couple of years even before covid set in. It can be hoped that the higher capex will generate some jobs indirectly as money spent on roads and railways will lead to an increase in demand for metals, cement, machinery etc, which will create employment. Hence while in absolute terms the numbers may not be very significant, it would be in the positive direction.
Fourth, the relation between GDP growth and the budget is pertinent. While the approach which is Keynesian in spirit is growth oriented, the ability of the Budget to lift growth is limited and hence while there will be a delta in terms of contribution, the main push has to come from the private sector. The capex of Rs 5.5 lakh crore cannot drive a GDP size of Rs 225 lakh crore and hence until the private capex cycle recovers can support the same though not bring about acceleration.
Fifth, is the price effect. While the GST rates are outside the purview of the government, the inflationary impact will be positive. This is so because higher spending in the face of moderate growth will be inflationary. Commodity prices have already started increasing and therefore the possibility of inflation cannot be ruled out. Also, the government has been silent on the excise duties on fuel products which has been a major earner of revenue. The imposition of cess will increase prices of fuel. The ratio of excise collections to GST was 40% in FY20 but has increased to 70% in FY21 as there are no constraints on these rates being imposed by the government.
Sixth, is the impact on savings. Here unfortunately the Budget has been silent on tax rates and hence is neutral on savings. It was expected that there could be some tax-free bonds floated which will help to raise the savings rate. However, the government has shied away from providing any incentive here and hence households could be a bit disappointed given that in the last year even the interest rates on small savings was reduced sharply.
Seventh, interest rates would tend to be affected by the overall borrowing of the government. The signal given is that it will take some time before the fiscal deficit will reach the level of 4.5% and probably even more for 3%. This means that there will intrinsically be pressure on liquidity as the centre along with states borrow more from the market. The clue will be with the RBI that has to manage liquidity closely to ensure that the interest rates do not rise sharply. But the tendency will be for interest rates to move in the upward direction.
Hence the budget should be interpreted as the first few steps in a fiscal stimulus on the expenditure side which will persist for the next few years until such time that the economy is able to stand on its legs. This can take at least 2 years to get to the 7% growth rate mark. Continuity in some of these expenditures would be necessary to ensure that the chain is not broken.
The author of the article is Chief Economist with CARE Ratings and author of Hits & Misses: The Indian Banking Story