Budget 2022: Ominous signs to address

Ever since the pandemic hit, the Centre has been announcing mega investment plans to revive and boost economic growth. In 2021, two such major plans were launched: National Infrastructure Pipeline (NIP) worth over ₹100 lakh crore and the National Infrastructure Master Plan (NIMP) or Gati Shakti. But have they seen investments on the ground?

Here is a reality check as the Centre finalises the budget for the next fiscal.

Capex slipping

To demonstrate its commitment to push investment, the Centre wrote letters to all chief secretaries of states and union territories in late December 2021, days ahead of the pre-budget consultations. A few days later its record keeper Controller General of Accounts (CGA) released the numbers for November 2021 revealing a distressing state of capex.

The record showed the Centre had spent only 49.4% of the budgeted money in the first eight months of FY22 between April and November 2021, as against a far higher 58.5% in the corresponding period of FY21, when the national lockdown caused a massive economic disruption. In the pre-pandemic FY20, when growth had fallen to 4% from a high of 8.3% in FY17, its capex during the same period was even higher at 63.3%.

The record also showed the Centre’s capex fell drastically from ₹57,483 crore in September 2021 to ₹23,919 crore in October and then slipped further to ₹20,360 crore in November 2021. This is despite a robust revenue collection, 75.9% of the budget estimates by November 2021, as against 40.2% during the corresponding period of FY21 and 50.1% in FY20.

The Centre’s total expenditure during the same period also remained below par – 59.6% of the budgeted expenditure, as against 62.7% in FY21 and 65.3% in FY20 – indicating a lackadaisical approach difficult to explain, given that the GDP growth had fallen to -7.3% in the previous fiscal and India had become one of slowest growing economies from the fastest growth major economy five years ago.

This disconnection in the Centre’s capex and total expenditure with the budgeted targets may show up in lower fiscal deficit (budget estimate of 6.8% of the GDP) but that is of little solace when reviving the economy is of utmost importance.

The first advance estimates, released recently, have lowered growth projection for the current fiscal to 9.2% (at constant prices), from the RBI’s estimate of 9.5%. The World Bank’s 2022 Global Economic Prospects report (January 2022) put it lower, at 8.3%, as it had in its June 2021 report for 2021 (January-December 2021), although it lowered the global growth from 5.7% to 5.5% for 2021 and from 4.3% to 4.1% for 2022 (January-December 2022) because of the Omicron threat.

Govt expenditure and fresh investments slip too

This is bad news. The first advance estimate shows two key growth engines slowing down in FY22 from FY21 level.

General government expenditure (Centre and states), or government final consumption expenditure (GFCE), is projected to be 12.2% of the GDP (current prices), which is lower than 12.5% in FY21 (although higher than 11.2% in FY20). Given that this is the most dependable engine of growth in the current situation, such a fall should be a cause of great concern for both the Centre and states.

The main growth engine, private consumption expenditure (PFCE), is also taking a hit in the current fiscal – falling to 57.5% of the GDP (current price) from 58.6% in FY21 and 60.5% in FY20. Poor consumption demand would keep production of goods and services low and reduce the scope for capex. The only good news that the first advance estimates give is a marginal improvement in investment (gross fixed capital formation or GFCF), which is expected to go up from 27.1% of the GDP in FY21 to 29.6% in FY22. But wait, there is a red flag.

The latest CMIE report says, in the quarter ending December 2021 fresh investment proposals fell to ₹2.1 lakh crore – from ₹2.2 lakh crore and ₹2.7 lakh crore in the previous quarters ending in September 2021 and June 2021, respectively. Here too, government has emerged as the primary culprit. The report says, the government contribution (both Centre and state) in new investment proposals accounted for only 20% in the quarter ended December 2021, from about 50% earlier. The government contribution had fallen to 21% in the quarter ended December 2020 and “since then, it has not recovered”.

Private investment, whose revival the Centre awaits since FY17 and for which it slashed corporate tax earnings by ₹1.45 lakh crore in September 2019 while facing tight fiscal situation, has been missing in action. The RBIs Financial Stability Report (FSR) of January 11, 2021 listed “lack of robust private sector investment” as the number one risk to the economic recovery. Its FSR of December 2021 says it is still waiting for the revival of private investment: “Entrenching the recovery hinges on revival of private investment and shoring up private consumption, which remain below their pre-pandemic levels.”

The RBI data shows private investment fell from a peak of 13.5% of the GDP in FY16 to 11.1% in FY20. The data for FY21 is not available but the FSR of December 2021 is quite clear that there is no revival. There is little to believe a dramatic change in FY22 when consumption demand remains below the pre-pandemic level.

These failures would have another negative consequence: no new job, rise in unemployment and more people turning to casual and the menial jobs that MGNREGS provides. This would weaken consumption demand further and cause a cascading ripple in the economy.

The pandemic not only saw a massive reverse migration of workers, multiple studies have shown that even prior to it, labour was shifting from well-paying formal sector jobs (salaried) to low-paying informal agricultural jobs. Millions of workers have dropped out of labour market also because there simply is no jobs to look for. The Ashoka University-CMIE study of May 2021 showed, the share of agricultural jobs increased by 4% (from 36% to 40% in total employment) during the five fiscals of FY17 to FY21.

The CMIE’s latest report further confirms this trend. It says 9.5 million salaried jobs (best category jobs) and 1 million jobs among entrepreneurs were lost to the pandemic, adding that “this massive 10.5 million loss of jobs was offset by gains in employment among daily wage labourers and more so among farmers”. For the record, the report recorded a rising unemployment rate in December 2021.

All the above trends need to reverse for the economy to regain growth and that should be one of the primary objectives of the budget being framed.