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Budget: Between promise and reality of state capacity

The political class aspired for an increase in transfer of resources to the poor.

Published: 06th February 2022 06:29 AM  |   Last Updated: 06th February 2022 08:24 AM   |  A+A-

FM Nirmala Sitharaman

FM Nirmala Sitharaman. (Photo | PTI)

The political class aspired for an increase in transfer of resources to the poor. The analysts of the political economy argued for stimulating private consumption. Serendipitously the demands of politics and the needs of the economy were aligned at the bottom of the income pyramid, which is also the electoral base. Ergo the consensus in the run up to Budget 2022 — in the light of the elections, particularly in Uttar Pradesh — was that it would be designed to address populist sentiments.

That was not the route chosen. The Modi government presented growth (mentioned 16 times in Finance Minister Nirmala Sitharaman’s 90-minute speech) as the antidote to the affliction of poverty and inequality. And to achieve growth, Budget 2022 is betting on a bigger bang for the buck from public expenditure on capital projects. The decision to eschew the temptation to take the populist road merits justifiable even if qualified applause.

The promise of growth is challenged by the reality of state capacity. The plan for ‘growth’ in Amrit Kaal rests on the premise of increased allocations for public investment. While the headlines screamed higher allocations on capital projects, the devilish details reveal that the projected increase was more in the optics of accounting. In a sense, it is a tacit recognition of what the government can achieve — more pertinently, the limitations of implementation by both central and state governments.  

The question which haunts the bet on growth via public expenditure is the less-than-promising track record and the state of inefficiency. This column has chronicled the faultlines in implementation of major projects (Infra Project Delays: Loss of Taxpayer Monies https://bit.ly/27Infra). The cost overruns for 480 projects, as per the government, stood over Rs 4.46 lakh crore and some projects were delayed by over 300 months. For sure, the idea of PM Gati Shakti will enable better planning but factors leading to poor implementation and accountability persist.

The budget illustrates the centrality of PPP in different domains including new areas such as logistics parks, agri zones and for rolling out Bharat Net. But PPPs are daunted by faultlines. The budget assures steps to enhance financial viability of projects “including PPP, with technical and knowledge assistance from multilateral agencies”. That is promising but it also raises the flag on efficacy of previous attempts — for instance, whatever happened to the recommendations of the 2015 Kelkar Committee report on PPP.

There is much criticism for the inadequate allocations towards human development and sustenance — outlays for education, health subsidies and the rural employment scheme MGNREGS are lower. And given the state of rising penury and inequality, the anger is justifiable. Context is critical for assessment of policy and expenditure allocations. It is true that allocations matter. Equally it matters that much of the welfare delivered is under the states. And there is evidence that states have kept large unspent cash reserves parked with the RBI — in 2020-21 and again in 2021-22. Neelkanth Mishra, India Strategist at Credit Suisse, estimates that governments — largely states and central — are holding unspent cash of around Rs 5.5 lakh crore, roughly 2.5 per cent of GDP.

This calls into focus accountability for management of taxpayer monies — available but not used for alleviation of misery and in expansion of GDP. Estimation of the loss to GDP must await finalised accounts and state budgets, but there is no disputing the loss of opportunity caused by unexplained idling of monies. And there are costs attached to idle money — data released by the RBI shows that the average borrowing cost of states has gone up to over 7.24 per cent. The opacity in public finance accounting allows laggards to get away. This calls for systemic reforms — and repair of reporting standards requiring governments to present data on unspent allocations and missed targets every quarter.

Notwithstanding the unexplained issue of unspent cash, the budget has offered states a grand package of Rs 1 lakh crore loans, interest-free for 50 years, as a special initiative to catalyse investments. The idea is good but the track record of states in using special initiatives to clean up and enable growth is less than inspiring. This is best illuminated by the situation of the power discoms which were funded by the Power ministry’s  Ujwal DISCOM Assurance Yojana (UDAY) barely five years ago. This December, the government told Parliament that accumulated losses of discoms touched Rs 5.07 lakh crore and outstanding payments to renewable companies stood at over Rs 1.56 lakh crore.

There is no doubting the intent and the initiatives in Budget 2022 — ideas such as the digital integration of postal savings accounts with banks, creation of agri value chain, enabling systems for battery swapping to push e-mobility, the clearing of regulatory cholesterol — could catalyse investment and growth. But the rollout and multiplier effect of these ideas rests on the efficiency of implementation.

India’s GDP is the sum of the growth generated across sectors and governments. The promise of the budget is challenged by the reality of state capacity.



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