Great On Growth, Not on Jobs

News: Recently Union Budget 2022-23 has been released.

 The article discusses the wise choices made in the budget along with challenges still existing to be resolved.

What are the excellent strategies seen in the Budget 2022-23?

One, the finance minister has avoided populist measure and focused on increasing public investment.

Government capital expenditure is expected to grow by 35% and interest-free loans will be given to states for capex spending.

It will increase private investment and build a base for strong growth in the future. Also, the twin balance sheet problem is on path of recovery and banks are ready to lend.

It will help in achieving virtuous growth cycle. To further encourage private investment, the Budget has offered stability in the direct tax regime.

It is done even when there is risk of high inflation because Inflation is mostly due to higher energy and commodity prices and the government has very less control over these factors.

Two, Budget 2022-23 has also focused on soft infrastructure. It will help in building trust, reducing cost of business and becoming a part of the world’s China+1strategy.

Three, Budget has imposed 30 % tax on income from trading in virtual digital assets. RBI will also come out with an e-rupee, a digital version of the paper currency next year.

Finance minister has also said that 30% tax on digital assets doesn’t mean legalizing them. But the Budget has made the first move towards accepting the reality of crypto assets. This will give time to crypto asset holders to adjust their portfolios.

Four, Finance minister has acknowledged that economic recovery is uneven. Hence, extended credit guarantee for MSMEs.

How government has planned to finance the increased capex?

First, nominal GDP is expected to grow 11. 1% in 2022-23 which will increase gross tax revenue by 9. 6% and the total expenditure is budgeted to increase by only 4. 6%. Hence, huge capex can be funded by increased tax revenue.

Second, the food subsidy and MGNREGA allocation have been lowered by about Rs 1. 05 lakh crore. Also, spending on vaccines and Air India will fall in 2022-23. These steps will free up resources.

What are the challenges existing for the Indian economy?

First, the major issue is joblessness and pandemic has added to it. For instance, nearly 10 million jobs have been lost due to growth slowdown and the shift in activity from the labour-intensive informal sector to the capital-intensive formal sector.

India is in need of huge numbers of jobs that can be fulfilled by MSMEs. MSME sector is job-intensive but Budget has nothing new for this sector except continuing the existing guarantee schemes.

Second, other major issue is fiscal deficit. It is 6. 9% of GDP this year and it has to decline to 6.4% by next year. Budget 2022-23 has committed to bring it down to 4. 5% of GDP by 2025-26. But it has not given the path and steps that will be taken to achieve that target. This would have enhanced credibility and reduced government’s cost of borrowing.

Third, people who want to shift to virtual transaction have already shifted to UPI-based fast payment systems. Hence, there are doubts about success of e-rupee.

Fourth, if inflation will rise, retail fuel prices will start rising again and RBI’s MPC will increase rates. But any sharp rate hikes will affect growth without bringing down cost-push inflation.

What is the way forward?

PLI incentives can be linked to job creation. Government should not follow protectionist policies and import tariffs should be reduced to make export sector competitive as it creates jobs.

Source: This post is based on the article “Great on Growth, Not on Jobs” and “Short, Sharp & Smart” published in Time of India on 2^nd Feb 2022.