Context: The capital expenditure (capex) has been raised by 35.4 percent for the financial year 2022-23 (FY23) to continue the public investment-led recovery of the pandemic-battered economy.
What is Investment-led growth?
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Investment-led growth relies on investment to create new capacity.
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This creates more employment and hence higher demand, while simultaneously, increasing production capacity.
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In investment-led growth, supply rises in tandem with higher demand, this leads to increased growth.
Budget 2022-2023 on Public Investment
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Budget 2022-2023 seeks to boost public investment by 35.4% at current prices over last year to raise its share in GDP to 2.9% from 2.2% last year.
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With grant-in-aid for state investments, the Budget hopes to increase public investment to over 4% of GDP.
How to attain Public investment-led growth?
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Capital investment:
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Capital investment helps in creating employment opportunities, inducing enhanced demand for manufactured inputs from large industries and MSMEs.
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Besides, it also helps in inducing enhanced demand for services from professionals, and helping farmers through better agri-infrastructure.
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Innovative financing:
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To encourage innovative financing, the government should incentivise important sunrise sectors such as climate action, deep tech, pharma, and agri-tech through thematic funds for blended finance.
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Boost infrastructure:
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One hundred PM GatiShakti cargo terminals for multimodal logistics facilities will also be developed during the next three years.
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Multimodal connectivity between mass urban transport and railway stations will be facilitated on priority.
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What are the Challenges with Public investment-led growth?
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With the threat of higher inflation and rising interest rates, meeting the ambitious investment target would be challenging.
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The sharp decline in private consumption is likely to be caused by the loss of employment.
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The derived demand for labour from an infrastructure boost may be limited, as the suggested projects are machinery intensive, not labour intensive.
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The annual industrial growth rate has sharply slowed down from 13.1% in 2015-16 to minus 7.2% in 2020-21.
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The Budget does not directly address the employment crisis caused by the novel coronavirus pandemic and the lockdown.
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Employment has contracted, most of which is in the informal or unorganised sector.
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Lack of demand is the real problem, with low capacity utilisation.
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If a substantial share of investment “leaks” out as imports, then the industrial output may not get the desired boost.
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Despite the clarion call for Atmanirbhar Bharat, India’s imports have shot up and India has become an import-dependent economy.
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The present Budget harps on improving the Ease of Doing Business (EDB) index and reducing regulatory constraints on industry and infrastructure to boost growth.
Government measures:
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Production linked incentive scheme (PLI): India launched a production linked incentive scheme (PLI) for numerous technology-intensive products to augment production and reduce imports.
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Make in India: India launched the “Make in India” initiative in 2014-15 to raise the manufacturing sector’s share in GDP to 25% and create 100 million new jobs in the industry by 2022.
Recommendations:
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Incentivise private capital and measures should be taken to enhance the financial viability of projects including PPPs.
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Enhance financial viability by adopting global best practices, innovative ways of financing, and balanced risk allocation.
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Improve India’s rank in the World Bank’s Ease of Doing Business (EDB) index.
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Mobilize resources to finance the investment as the Budget seeks to reduce the fiscal deficit ratio.
Conclusion:
The Budget for 2022-23 is a bold effort at public investment-led growth. But concerns of the unemployment crisis, fall in the share of private consumption in GDP, and rising economic inequality needs to be given due consideration.