India’s growth trajectory: The Shakti In The Gati

Beyond 2022–23, if India grows at say 7%, does that mean labour productivity will grow at the same rate? Of course not. There will be jobs, much more than the 6 million in 5 years mentioned in Budget

Published: 02nd February 2022 12:36 AM  |   Last Updated: 02nd February 2022 04:32 PM   |  A+A-

Illustration: Soumyadip Sinha.

“Gati” is a Sanskrit word, meaning motion or path. “Shakti” is also a Sanskrit word, meaning energy or force. Gati Shakti can therefore be taken as a force that propels movement along a trajectory. There is a growth and development trajectory set for India, suddenly subjected to disruption because of the exogenous shock of the pandemic. As the Economic Survey for 2021–22 and FM’s Budget Speech for 2022–23 both pointed out, India has weathered the storm fairly well and growth recovery has been robust across sectors, absolute GDP surpassing the pre-pandemic level. Real growth in GDP in 2021–22 was 9.2% and in 2022-23, the Survey estimates real growth between 8% and 8.5%. That 8–8.5% doesn’t mean a medium-term growth trajectory in that range, since 2022–23 will benefit from revival of contact-intensive sectors and some services. The low base of 2021–22 will aid the growth number. What is the growth path beyond 2022–23 and what role does the Union Budget have in this? For 2022–23, the Budget estimates nominal GDP growth of 11.1%. This is a nominal growth number, real growth plus inflation, inflation measured by what economists call a GDP deflator. What’s the GDP deflator for India now? Probably around 4.5%, perhaps a little more. If it is a little more, this makes the argument stronger. With a deflator of 4.5%, real growth in 2022–23 will be 6.6%, significantly below the Survey forecast.

The simple point is that, while framing a Budget, there is always a temptation to overestimate growth and revenue. This has happened in the past. But for this Budget, numbers are very realistic, indeed conservative. This is in line with the honesty and transparency Nirmala Sitharaman has brought as FM to the budget-making process. For instance, in 2020–21, off-Budget items were added to deficit numbers. That improved fiscal marksmanship is also reflected in little deviation between BE (budget estimates) and RE (revised estimates) for 2021–22. In BE, fiscal deficit/GDP ratio was estimated at 6.8%. In RE, it is 6.9%, marginally higher, though the revenue deficit ratio is higher, understandable because of the pandemic shock. Is the uncertainty over and is growth recovery robust? The answer to both questions is in the negative, which is why the Budget doesn’t have medium-term fiscal projections. The four drivers of growth are consumption, investments (private), government expenditure and net exports. On all four, numbers can be cited to establish recovery. But is this guaranteed? Since it is not, without giving up fiscal consolidation as a longer-term goal, how prudent is it to slash government expenditure drastically now? Government borrowing has costs. In passing, in this Budget, government borrowing is not excessive and disinvestment receipts (Rs 65,000 crore) are also realistic.

To return to the point, given those costs, it would have been tempting to slash the fiscal deficit/GDP ratio to 6% in 2022–23. Instead, it is being reduced by 0.5% on that base of 2021–22 to 6.4%, reasonable, doable and not excessive. The target of 4.5% by 2025–26 hasn’t been abandoned. More important is the question of the form government expenditure takes. Leading up to the Budget, many commentators said it would be a “populist” Budget, whatever that expression means, an argument substantiated by mentioning state-level elections. Others treated it with a “sindoor” mindset, an allusion to Narayan Dutt Tiwari’s 1988-89 Budget. Historically, Budgets have been viewed with the perspective ‘what does it have for me?’ Has it reduced taxes I pay? Indirect taxes are of course the purview of the GST Council, though the Budget highlights several procedural improvements in GST processes. On direct taxes, there is virtue in stability and certainty in tax rates. Substantial reform of direct taxes will involve exemption removal, certainly leading to increases in effective tax rates for some categories. With recovery not certain, that would have been premature. There is also the point that public expenditure multipliers are higher than tax multipliers (On direct taxes too, procedural improvements have been flagged). Hence, the answer is not to tinker with direct tax rates, hand out an exemption here, or another there. The answer is to increase capital expenditure, primarily on infrastructure. This is precisely what the Budget does. Thus, Gati Shakti has a different nomenclature too, emphasising roads, railways, airports, ports, mass transport, waterways and logistics. Notice that a scheme like MGNREGA is demand-driven. If there is additional demand, BE allocations can always be supplemented. What’s important to ensure is that there isn’t demand for MGNREGA.

The Budget is but one day in the government’s functioning. The government doesn’t cease to function on other days of the year. The Budget should be viewed more in terms of what FM said, growth and inclusive welfare, the goals of Amrit Kaal and India’s template for 2047. The 2021–22 Budget speech set out such a vision and the 2022–23 Budget adds to that, India at 75 moving to India at 100. Despite Covid causing a disruption, was there anything wrong with the vision of enabling growth, spliced with empowering citizens? There wasn’t, so why tinker with the template? For 14 sectors with the production linked investment scheme, the Budget mentions six million new jobs in five years. Beyond 2022–23, if India grows at say 7%, does that mean labour productivity will grow at 7%? Of course not. Ipso facto, there will be jobs and employment, good for everyone, much more than six million in five years. If one looks at the Budget with that perspective, and not solely in terms of one’s individual interest, myopia and preference for tax concessions, it has been an extremely good Budget.

(Chairman, Economic Advisory Council to the PM)



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